Enhancing returns in fixed income markets | Insight Investment

Active managers do generally add value in fixed income.

Contrary to popular belief, active managers often outperform benchmarks in fixed income markets, which are less efficient and transparent than equity markets. Data from MercerInsight shows that the median active managers in their customised global credit and global aggregate universes have outperformed traditional benchmarks over the past 10 years.

There are various strategies that can be used to enhance returns:

• Duration and yield curve: Positioning based on market yield outlooks or yield curve shape.
• Security selection: Identifying undervalued securities with strong fundamentals. New-issue premia: Capitalising on new debt being issued at above market yields.
• Exploiting market fragmentation: Seeking opportunities that stem from the fragmented nature of bond markets.
• Sector strategy: Seeking out those sectors that offer the best opportunity or avoiding those at risk.
• Beta management: Adjusting credit risk exposures to take advantage of expected trends in credit markets.
• Relative value: Exploiting value differences across markets.

Active investment in fixed income has on average paid off over the past 10 years. We can name seven key structural reasons why active fixed income managers find it easier to beat passive managers, but in this video we focus on just the three main causes.

Being able to exploit market volatility is a key reason active fixed income managers outperform passive managers. The high level of volatility seen in markets this year creates opportunities where bonds become cheap or expensive relative to their fundamental value.