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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Apr 30

Written by: Donald van Deventer
4/30/2017 7:48 PM 



Mr. X, How would you describe your fixed income investment strategy?

“I see my overall strategy as a go anywhere, any maturity bonds-only investor.   I’m indifferent between municipals, governments, corporates, or certificates of deposit.  I only care where the relative value is.”

What tools did you use over the last year?

“I execute my trades through popular retail investment platforms, none of which are associated with any Too Big to Fail institution.  I also subscribed to The Corporate Bond Investor on SeekingAlpha and then added an individual investor subscription to Kamakura Risk Information Services (“KRIS”) from Kamakura Corporation.”

Can you go into some more detail on the strategy that worked so successfully for you?

“First, I should caution readers that one year’s performance isn’t long enough to distinguish between a high quality risk-adjusted investment strategy and just damn good luck.  With that caveat, this is what I did. With each individual corporate bond purchase I seek to get the highest yield to maturity return with a KRIS cumulative probability of default of x% or less, in the shortest time frame possible.  I’d prefer not to disclose what level “x” is for me.  The best cut off for an individual investor will be very personal, depending on the individual’s risk tolerance. I always want the issuer of a purchased bond to be earnings positive when I buy.  Ideally, my broker’s ratings of the corporate common stock should also at least neutral to positive.   I’m not presently speculating on CCC bonds.   And it is really nice if the stock shows an intermediate term stock price bottoming trend with a recent upswing.”

“Note that I don’t try to forecast and match my future expected cash needs as The Corporate Bond Investor recommends.  Instead I try to maximize current total portfolio yield to maturity consistent with a low cumulative Kamakura default probability (x% or less) and the shortest time frame possible. My current weighted average maturity is 5.09 years with an estimated yield to maturity of 4.34% at current bond prices.  In terms of legacy ratings, 78% of my bonds are BBB to BB, with only a few single A and B bonds. The default probability hurdle keeps me away from severely distressed junk.  I am aware that research on distressed equities shows they underperform low default risk equities, and I believe that the same is probably true for highly distressed debt.”

Mr. X, looking backward, can you share with us the sources of the very large alpha you locked in over the last year?

The alpha for me this year was in capital appreciation from bond purchases in Oneok (OKE), Enable Midstream (ENBL), DCP Midstream (DCP), and Buckeye Partners (BPL) (all pipelines), as well as in Seagate HDD (STX) and Signet UK (SIG).   Last spring and early summer I saw that the pipelines had high yield to maturity, were currently earnings positive in spite of low oil prices, and also had a very low cumulative Kamakura default probability (“KDP”).

Mr. X, thank you very much for sharing your insights with our readers and congratulations on a very successful year.
About Mr. X


Mr. X is a retired Federal government career civil servant with a good set of analytical skills.
 

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