The method of figuring out these alternatives begins with SANTA’s supply. SANTA is a proprietary instrument that RPIA developed again in 2019; an acronym for Structuring, Evaluation and Buying and selling Assistant. SANTA pulls vendor pricing from across the globe and plots particular person curves for an organization in addition to sector curves. It may well establish when a bond issuance is mispriced towards the corporate curve or sector curve. Given the sheer variety of securities in the marketplace, this quantitative instrument is an important first step.
As soon as SANTA makes its supply and factors out these mispriced alternatives, managers take over. Generally, Lagopoulos notes, a bond may commerce low cost or wealthy on the curve as a result of it’s a extremely illiquid issuance. It may solely be round $100 million in deal measurement, when actual liquid alternatives are available particular person bond offers which are over a billion {dollars} in measurement. Human managers can apply standards like liquidity in addition to the work of elementary evaluation to slim the sector of alternatives additional and search for areas of worth that they’re constructive on or areas they suppose are overpriced and could be shorted.
Whereas the size of the market sits on the core of those pricing alternatives, there are additionally present circumstances that create new areas of doable upside. Lagopoulos notes that when volatility out there picks up total, mispricing usually happens as a result of company credit score is an “over-the-counter market.” The current rise in total market volatility pushed by US commerce coverage has created extra mispriced alternatives for Lagopoulos and his workforce to establish.
Furthermore, he notes that the general amount of company debt has grown considerably lately. Within the US market final yr, he notes, roughly $1.4 trillion in new company debt was issued. That quantity of debt compounds the influence of volatility on pricing, creating new alternatives to make the most of a worth dislocation.
Profiting from these alternatives, Lagopoulos argues, requires instruments like SANTA and devoted groups to comply with up with the elemental evaluation. It requires the entry to markets that establishments and specialised lively managers can acquire whereas many retail buyers and advisors could lack the quantity to execute successfully. It additionally helps to have a complicated and devoted method, in his view.