Unconstrained Fixed Income
Investing for potential return that aims to balance yield, capital growth and risk in a flexible, unconstrained fixed income approach
What is Unconstrained Fixed Income
Traditional fixed income investing is often benchmark-oriented. This means the aim is to add value over a chosen index, regardless of the index is moving up or down. These types of portfolios are usually built with reference to that index and can be constrained to a particular area of the fixed income universe such as a region, sector, maturity or credit quality.
An unconstrained – or ‘go anywhere’ - approach is benchmark-agnostic with portfolio construction generally based on growing income and capital without reference to an index. This provides the potential flexibility to capitalise on opportunities across the fixed income spectrum as and when they arise.
The focus is usually on aiming for risk-adjusted returns. In other words, trying to achieve a potential return for a given level of risk. It may therefore form a core bond portfolio for investors seeking moderate capital growth and income.
Why Consider Unconstrained Fixed Income Investing?
There are two components from a fixed income portfolio: yield – or income return from coupons – and capital growth of the assets over time.
Some bond investors focus only on the income element but in recent years historically low government bond yields are making it harder for traditional fixed income strategies to generate adequate income from lower-risk investments. Simply chasing higher yields may cause investors to ignore increasing risk in the portfolio.
Unconstrained Fixed Income investing is a more holistic approach that considers both income return and capital return, rather than an individual component. Income received by the portfolio can be reinvested back into the underlying assets with the aim of maximising total return.
Unconstrained total return
An unconstrained approach can lend itself well to generating potentially attractive total return. With the focus on flexibility and diversification, unconstrained fixed income investing aims to seek out opportunities for both income and growth across a broad range of fixed income securities while balancing the risks of different assets.
Fixed income comprises a variety of sub-asset classes. Different bonds potentially have different performance and risk drivers. Performance of each sub-asset class is correlated to a different part of the economic cycle. The economic cycle is in constant motion so a portfolio needs to be able to adapt.
An active, unconstrained approach to fixed income investing can have the flexibility to use dynamic asset allocation and effective diversification to try and capture different performance drivers at the right time, while managing the associated risks.
How they work?
Active unconstrained -approach typically aim to take advantage of market opportunities and focus on downside preservation to deliver attractive risk-adjusted returns throughout the economic cycle.
This approach can allocate across the global fixed income universe (government bonds, inflation linked, investment grade credit, high yield and emerging market debt) and would seek to respond to different stages of the market cycle and allocate accordingly.
Our fixed income investment team has a proprietary framework which breaks down the global fixed income universe in a simple and transparent way, according to risk factor sensitivity. We categorize bonds into three risk buckets – defensive, intermediate and aggressive – so allocation can be adjusted depending on the market environment, to help mitigate risk
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