Misperceiving risk is biggest misunderstanding investors have about investing in credit," says Barry Allan, CEO, CIO of DMAT Capital Management. It's perhaps also the reason for his long term success and record as a fixed income investor. He launched DMAT Capital in 2019 shortly after leaving Marret Asset Management.
"I wanted to start a firm that would be smaller, more flexible, more focused, and particularly more tactical than what I had done before. When you found
companies and you work on them and you build them up for 20 years, they become bigger, you have bigger staffs, they become a little more bureaucratic. I just think that the world requires a much more tactical approach, as I said. I wanted to start a firm that was going to be smaller, more flexible and more focused than what I had been involved in the past, because I think that’s really the way where the world is going."
In this eighth segment of our series, Allan points out how investors are misunderstanding risk, explains how corporate bond issuance works, and shares some examples of corporate bonds he likes and why.
"The biggest misunderstanding is that investors are willing to take large amounts of risks in the equity markets where you could lose 100% of your money if you're wrong, and they're actually a little bit too conservative in the credit markets, where if you're wrong, you only lose 40-50% of your money," says Allan. "With the equity market, you have more upside, of course, but investors generally tend to be more risk averse in the credit market than they are in the equity markets, relative to the reward they could get, and that's because of the old days when where everybody invested for yield, and you didn't want to see companies default. You just wanted them to pay you your money back. But those days, unfortunately, are over, unless you're happy with a 1.5% return."
Getting risk budgeting right in portfolios is one of the reasons investors tend to underperform the investments they own over time. When investors get their risk budgets wrong, it leads to greater odds of making significant behavioural mistakes. Investors typically get the risk budget wrong when it comes to investing in credit because they believe it is riskier than it actually is. When investors get their risk budgets right, they tend to make less behavioural or emotional mistakes, and are able to be more patient through difficult periods, such as drawdowns, and are more likely to be successful investors in the long term.
Horizons Active High Yield Bond ETF (HYI), is now sub-advised by DMAT Capital Management Inc. DMAT assumed sub-advisory responsibility of HYI as of November 4, 2020.
Horizons Tactical Absolute Return Bond ETF (HARB) is a new ETF, sub-advised by DMAT Capital Management Inc. It will provide an actively managed fixed income strategy with the flexibility to “go anywhere” for tactical investment opportunities, which could be more important now than ever before.
Barry Allan is the President, CEO and CIO of DMAT and has more than 38 years of industry experience running investment mandates across the full spectrum of the fixed income world, including Government bonds, investment-grade bonds, high-yield bonds and distressed bonds. Prior to founding DMAT, Mr. Allan founded Marret Asset Management in 2001, and built it into a full-service asset management firm, which when he left in 2019, had assets under management of more than $4.4 billion. Mr. Allan has also held senior positions with Altamira Management Ltd., where he managed a wide range of global fixed income mandates, and Nesbitt Burns, where he was a proprietary trader, Director, and head of fixed income derivatives.
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