Systematic Fixed Income

CHAPTER 4Incumbent Active Fixed Income Managers

OVERVIEW

This chapter starts with a high‐level overview of the types of investment approaches that are commonly used by fixed income managers. Active fixed income investment strategies include (i) avoidance of bad‐selling practices (e.g., avoiding simple reliance on index inclusion rules), (ii) duration timing and yield curve management generally (e.g., variants of the tactical timing strategies discussed in Chapter 3), (iii) rotation across the broad sectors within aggregate indices (e.g., moving from developed to emerging markets or switching from duration to spread risk), (iv) seeking additional sources of return beyond the benchmark (e.g., private credit, bank loans and emerging markets), and (v) security selection, the primary focus of this book. Most of the active fixed income returns in excess of benchmark can be explained by passive beta, particularly an overreliance on the credit premium. We will see this pervasive pattern of reaching for yield via credit exposures across a wide set of active fixed managers including (i) US aggregate benchmarked managers (Core Plus), (ii) Global aggregate benchmarked managers, (iii) unconstrained bond managers, (iv) emerging market managers, and (v) credit long/short managers.

4.1 FRAMEWORK FOR ACTIVE FIXED INCOME MANAGEMENT

Let's start with a summary of the different types of investments an active fixed income manager can make. As outlined in Chapter 1 there is a huge investment opportunity ...