Fixed Income Investment Process

Just as in equity investing, there is wide variety of different fixed income investment processes, employed by a wide variety of different fixed income investor types. The first distinction to be made is between those following a “strategic” process, with little deviation from longer-term benchmarks, against those following a more “tactical” process, where deviation from benchmarks might be large and changeable.

The second distinction to be made in the Fixed Income Investment Process is between those following a fundamental approach against those following a more quantitative approach. Either of these approaches can potentially be top-down or bottom-up in nature.

For instance, one fixed income portfolio manager might follow a fundamental, top-down process in constructing their fixed income portfolio. They might, for instance, believe that they have superior skill in forecasting future economic conditions and judging the likely path of interest rates, and thereby select investment accordingly, either by duration or security-type to benefit from their global macro view. It’s also worth adding that in recent years, the practice of factor investing in credit markets has been gaining (ahem) momentum.

Another company might adopt a bottom up, quantitative approach to the fixed income investment process, believing that they have an edge in judging the credit risk associated with individual corporate bond securities. Yet another might believe in following top-down, quant approach – perhaps a momentum-based approach at a sector or market level. The combinations of different approaches are endless, and companies will invest great resource in developing and testing the best approach.

Of course, not all portfolio mandates involve a static asset allocation benchmark with well-defined ranges for each sector or asset class. Some fixed income mandates may have a dynamic benchmark. Other portfolios might actually be managed on the basis of unconstrained or absolute return fixed income investing.

An area where most fixed income investors experience an element of constraint is in the credit risk they are permitted to take on. The fixed income asset class offer multiple layer of opportunity in fixed income sub-asset classes. These are associated not just with a higher risk-reward trade off, but also with lower levels of liquidity.

Each year, Savvy Investor analyses the best papers on the fixed income investment process and gives awards to the best papers of the year, across a number of market sectors. For an example of this, see “Best Fixed Income Papers 2018”.

For an up-to-date picture of the investment outlook for fixed income markets, visit Savvy Investor’s “Debt and Credit Outlook” section, which hosts the best buyside research from around the internet, all curated and aggregated in one place.