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True to the core: An interview with Tom O’Connor

With volatility predicted for 2015, consider an anchor for your bond portfolio. Tom O’Connor, CFA, has been a portfolio manager for the Wells Fargo Advantage Core Bond Fund since 2003.

What is your investment philosophy?

Our investment philosophy has four major tenets:

  1. Focus on bottom-up security selection.
    This means that we don’t just fill a predetermined allocation for a macro exposure, like duration, yield curve, or sector allocation. Bottom-up security selection means that we look at a universe of high-quality, liquid bonds and select securities based on their relative value on a return-to-risk basis.
  2. Use active relative-value trading.
    This second tenet pairs nicely with the first, which means that we try to take smaller exposures relative to the benchmark and use active management. This active approach is in direct contrast to other funds with buy-and-hold strategies. By looking at relative value, we seek to take advantage of small mispricings in the market, paired with our focus on bottom-up security selection.
  3. Implement risk controls in real time.
    We use a rigorous, proprietary risk management system called RiskSum to accomplish two goals. First, we try to limit our macro exposures to minimize excessive risk relative to the benchmark. And, second, we focus on risk-adjusted positioning to make sure that we’re constantly making the best risk/reward decisions for the fund.
  4. Maintain an informational and analytical edge.
    By being active in the markets, we are able to discern who is doing what to whom. We are also constantly checking the liquidity in the market. Our investment team has significant experience on Wall Street, and that gives us an edge in using this information to navigate over-the-counter markets.

How do you know if this has been successful?

We consider the proof of our success to be the information ratio. The information ratio is a portfolio statistic calculated by dividing a fund’s excess return by the standard deviation of excess return. What it measures is how much return you generate versus how much risk you take—or more simply, a manager’s skill versus luck. We have been pleased with the Core Bond Fund’s information ratio.

What can you tell us about your investment team?

The team has an average of two decades of investment experience. We have been working together for more than a decade. The team has been tested by some very challenging markets, the 2008 financial crisis in particular. This was a real litmus test of the stability of our team and the consistency of our investment process. The fund had a positive return in 2008, a year when a lot of fixed-income managers delivered surprises to their investors. Staying true to our philosophy during this challenging time was rewarded, to the benefit of our shareholders.

Some strategists are predicting a volatile 2015. What does volatility mean for investors?

Volatility may be stressful for individual investors, but high volatility with the right blend of liquidity is very good for our process. Sometimes challenges for others can potentially create opportunities for those of us with conservative positions and an active process. This could be due to fundamental or technical elements in the market.

There are a lot of wildcards in the outlook for 2015, including the price of oil, the performance of global economies, and Federal Reserve policy. We believe that we are well positioned with our active approach and disciplined focus on risk, and we stand ready to take advantage of bottom-up relative-value opportunities as they arise.

  • Not FDIC Insured
  • No Bank Guarantee
  • May Lose Value

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