The size of today’s global fixed income market is about US$110 trillion1. In this article, we would like to introduce an unconstrained fixed income investment strategy2, which could be little known among retail investors.
1. What is an unconstrained fixed income strategy?
- Fixed income covers a wide range of sectors. In addition to traditional fixed income sectors such as government bonds and investment-grade corporate bonds, there are also non-traditional ones such as high-yield corporate bonds and securitised credit.
- An unconstrained fixed income strategy goes beyond the traditional. It invests opportunistically across sectors and geographies in the fixed income universe.
2. Why go beyond traditional fixed income?
- There are different types of risk factors driving the movement of yields. Yields of individual traditional sectors tend to be affected by single or a few risk factors. For example, US treasury yields are solely affected by interest rate movements.
- Investing dynamically in multiple types of fixed income sectors allows a wider source of income which are less likely to be impacted by a single risk factor. This can create income from a more balanced combination of fixed income sectors and help diversify portfolio risks.
3. How to build an unconstrained fixed income portfolio?
- As the economy moves deeper into a late cycle, investors may want to dynamically adjust the depth and breadth of their fixed income allocation to build greater portfolio resilience. Active asset allocation management is crucial in response to changing market dynamics but the comprehensive research and robust security selection process may require extensive effort of an individual investor.
- Seek professional advice from active managers with a long-term view and global reach.
1Source: Bank for International Settlement, as of June 2018. Refers to the outstanding amount of global debt securities which include domestic debt securities and international debt securities issued by general government, financial corporations, non-financial corporations and international organisations.
2For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions.
3Source: Barclays live, J.P. Morgan Asset Management. For illustrative purposes only. Based on representative index level data, except for esoteric asset-backed securities (ABS) and non-agency mortgage-backed securities (MBS) which reflect our proprietary yield calculations. US 10-year treasury, Esoteric ABS and non-agency MBS are yield to maturity. Investment grade corporate, emerging market corporate and US high yield corporate are yield to worst. Emerging market sovereign is a blended yield. As of 31/12/2018. Yield is not guaranteed. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results.
Investment involves risk. Investors should consult professional advice before investing. The opinions and views expressed here are those held by the author as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice.