Despite uncertain markets and slowing growth, investors may consider high-quality fixed income investments. Yields remain attractive across fixed income sectors, and adding fixed income to a diversified portfolio provides some hedging as global growth momentum slows.
Why maintain a quality bias in fixed income?
Markets have largely been unsettled with volatility rising in the second quarter.
Gauges of stock and bond market volatility – the Volatility Index (VIX) and Merrill Lynch Option Volatility Estimate Index (MOVE) – continue to remain elevated as investors navigate the geopolitical and economic environment1.
Such periods of elevated volatility can present a greater challenge when hedging against market risks. Against this backdrop, fixed income may play a crucial role in generating income opportunities and mitigating downside risks in portfolios. Still, valuations are relatively attractive with real yields hovering near multi-year highs2.
While the US economy looks resilient, concerns about the size and sustainability of its fiscal deficit persist. High-quality fixed income, emphasising credit quality and duration3, may help manage downside risks. Active management and keeping a quality bias remain crucial.
Leveraging active fixed income indexing
In the current market environment, actively managed fixed income strategies may have greater potential to uncover alpha opportunities missed by passive strategies.
The Bloomberg US Aggregate Index, for example, excludes about 47% of the US$53 trillion US public bond market4, including high-yield corporates and non-agency mortgage-backed securities. Asset-backed and agency securities5 have limited exposure, and much of the securitised market is excluded4.
Additionally, active managers have historically outperformed passive strategies. Net of fees, the average annualised returns of active core and core plus managers have exceeded the Bloomberg US Aggregate Index over the trailing 3-, 5-, and 10-year periods6.
An active exchange-traded fund (ETF) structure presents active managers the flexibility to tailor and optimise investments, without the constraints of replicating an index.
Amid slowing economic growth momentum, quality fixed income assets with higher credit ratings could prove optimal for portfolios. Investing in a global portfolio of high-rated bonds may present diversification opportunities and help manage portfolio volatility.
JPMorgan Global Bond Active ETF (JPGB) - a high-quality bond portfolio with an ETF wrapper
JPGB is a strategy that employs a quality-biased approach to construct a high-quality portfolio. It primarily seeks exposure to investment-grade (IG) bonds (at least 80%7) across the globe and actively shifts its allocation towards areas with stronger fundamental outlook. In addition, the strategy actively seeks to manage duration3 and currency risks through a disciplined yet dynamic risk management approach8.