Investment Philosophy and Process
The majority of investors in the short-term market are primarily concerned about liquidity and capital preservation. This philosophy dictates a conservative investment posture including excellent credit quality, ample diversification, and liquidity.
The key element that distinguishes TKS Baker from its competitors is that our investment philosophy places credit ahead of yield. Our focus on safety and preservation of capital continually drives our investment analysis and decisions. Nevertheless, TKS Baker has a long history of providing competitive returns within strict credit quality and liquidity constraints.
TKS Bakers’ investment process stresses a segregation of duties between its portfolio managers and credit analysts. Under the direction of the Chief Investment Officer, the portfolio management team constructs, monitors, and reviews each portfolio continuously, and implements investment strategies for each product type. The credit research team reports to the Chief Financial Officer and creates an Approved Issuer List from which the portfolio managers select to utilize in the portfolios. The Approved Issuer List details eligible issuers, maximum duration parameters for each issuer, and provides an additional layer of transparency for all shareholders.
The portfolio management and credit research teams each have formal weekly meetings to review their respective areas of expertise, and then meet together each week along with representatives of the sales, marketing, and relationship management teams to communicate investment strategy, changes to the Approved Issuer List, and other matters. These meetings also provide a forum for new investment ideas and opportunities.
The credit research team conducts fundamental credit research for each approved issuer. This includes analysis of the issuer’s capacity to repay its short-term debt based on cash flow, ability to react to future events, assessment of the issuer’s liquidity, and a worst-case scenario evaluation. Our analysts have a variety of resources available to assist in evaluating the credit quality of issuers, including, Bloomberg, Fitch Research, Moody’s and Standard & Poor’s Capital IQ along with our own independent evaluation of financial ratios and reports. It is the responsibility of the credit research team to monitor the creditworthiness of each approved issuer, and, if necessary, to propose the removal or reduction in approved duration of an issuer if credit deterioration occurs.
Maximum levels of issuer concentration, weighted average life (WAL) and weighted average maturity (WAM) are determined by a pool or separate account Investment Policy Statement and/or a fund’s Prospectus and Statement of Additional Information. The majority of our funds are governed by Rule 2a-7 of the Investment Company Act of 1940, and some must follow the additional requirements imposed by Moody’s and Standard & Poor’s in order to maintain their AAA-rating. All taxable funds holding commercial paper, certificates of deposit, and other money market instruments are limited to investing in a maximum of 5% of the fund’s assets in any one issuer. All taxable funds may hold unlimited amounts of direct obligations of the U.K. Government. WAM is limited to 60 days for Rule 2a-7 funds, and between 40 and 60 days for rated funds. Shorter-weighted average maturities result from our interest rate outlook scenario or cash flow projections.
In addition to the high credit standards and diversification requirements, liquidity is provided by overnight investments, including repurchase agreements. All repurchase agreements are transacted using tri-party sub-custodian agreements with counterparties that are primary government dealers or considered creditworthy in conjunction with the underlying collateral requirements and tenor. Collateralization of at least 102% is required in underlying collateral. We limit our repurchase agreement counterparty exposure to a maximum of 25% of the fund’s assets with any one dealer, and a maximum of 40% if the counterparty is a Level 1 provider as defined by S&P.
