Process & Capabilities

Process

Investment Valuations consistently applied in portfolio decisions with a strong focus on managing risk.

Investment Value is at the core of Colchester’s investment process. It is the synthesis of “Real Value” and “Financial Stability” assessed across countries, currencies, sectors, duration and maturity.

Real Value is captured by our estimates of the prospective real yield – after subtracting the impact of expected inflation from the nominal yield. This is supported by a robust inflation forecasting framework grounded in the monetarist tradition. Our inflation forecasts are primarily underpinned by lagged money and credit growth. This monetary orientation is supplemented with more direct ‘price’ information arising from commodity price and currency changes. We also attempt to capture demand pressures through the use of ‘capacity’ utilisation terms when relevant.

Financial Stability Score represents an assessment of a country’s overall balance sheet and governance standards and includes, where it is possible and practicable to do so, environmental and social, factors. The Financial Stability Score is produced both for the bonds issued by a country and for the currency. We do this through an extensive assessment of the macro-economic environment, policy framework, ESG standards and other country specific factors. Countries with strong financial balance sheets will receive a premium while weaker ones will be penalised.

ESG factors are an integral part of the investment process and they are incorporated into the balance sheet analysis. We believe that a government with sound ESG policies will produce better economic outcomes compared to countries with poor ESG practices. The strength of governance is a key consideration in the determination of the Financial Stability Score.

Our Investment Management Committee approves inflation forecasts, the bond and currency financial stability scores and the resulting real yield and real exchange rate valuations. We utilise an optimisation process which is used to construct efficient portfolios that offer the highest available real yield and exposure to the most attractive currencies on a real exchange rate basis, within the overall risk constraints of the portfolio.

Our goal is to allocate the tracking error budget to generate two-thirds of the excess return through the bond portfolio and one-third of the excess return through the currency portfolio.

Keith Lloyd explains Colchester’s investment process

Capabilities

Our central investment strategy is applied consistently across each mandate, to multiple benchmarks and different base currencies, whilst offering alternative currency hedging strategies.

Clients have the option of tailoring a portfolio to their needs; whether it be within our flagship global sovereign bond capability or another subset of the market such as local emerging markets, inflation linked bonds or our alpha program. Colchester offers the ability to manage to a range of benchmarks, and various currency management and risk parameters.

Investment management services are offered to Australian clients on a separate account basis for mandates over A$75 million. Wholesale funds are offered to investors via platform or to wholesale clients for a minimum investment of A$1 million.

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