INVESTMENT PROCESS
Colchester Global Investors looks to establish portfolios with high prospective real yields. Because the prospective real yield is defined as yield minus estimated future inflation, an inflation forecast for each country is required. Colchester Global Investors devotes significant resources to inflation forecasting, combining both empirical modelling techniques and the extensive knowledge of its seasoned professionals. While prospective real yields are a powerful investment tool alone, it is helpful to supplement this work with an assessment of a country's current account, fiscal balance, external debt, etc.
Currency management is performed primarily to preserve the value found in country
bond markets. However, Colchester Global Investors believes that from time
to time, excellent return-enhancing currency opportunities can be identified
by looking for extremes in value of real exchange rates. Real exchange
rates, therefore, are the main focus of Colchester Global Investors' currency
research efforts, but again, it is helpful to supplement this work with
current account and fiscal balance considerations.
Portfolios are constructed using a traditional mean-variance framework. Colchester Global Investors' investment professionals determine the appropriate overall risk stance at a given time; then they decide upon the amount of risk to be shared between the expected contribution from, firstly, bonds, and secondly, currencies. This process is applied in a disciplined manner, applying judgment where appropriate and ensuring that the final portfolio is consistent with the risk tolerance, constraints and objectives of the client or fund.