2019 Compelling Alternatives for Cash Investors - April 2019
2019 April - COMPELLING ALTERNATIVES FOR CASH INVESTORS
Our approach to fixed interest investing - April 2019
We take an active approach to fixed interest portfolio management. All investment decisions are driven by proprietary research across the full spectrum of potential return enhancers. These include duration and yield curve positions, off-benchmark positions through inflation-linked assets as well as yield enhancement through credit-enhanced assets. As is the case with equities, we believe value can be added within the fixed interest universe through bottom-up security selection when assets are mispriced. Critical to the success of our fixed interest funds is our dynamic response to changing market conditions through active management of portfolio duration. The fixed interest investment cycle (see Figure 2) guides our duration management, asset allocation and yield curve positioning. In its simplest form, the cycle is divided into two halves, which represent a falling inflation environment (good for bonds) and a rising inflation environment (bad for bonds). While the chart looks neat and even, the length of time it takes to move through each quadrant can be very different.
DURATION: A measure of the change in the price of a bond or other debt instrument in response to a change in interest rates. Bond prices and interest rates move in opposite direction.
YIELD: A measure of the annual income paid as a percentage of the price of a bond.
YIELD CURVE: A graph that plots the yields of similar-quality bonds against the length of time they have to run to maturity, ranging from shortest to longest
FIGURE 2 - THE FIXED INVESTMENT CYCLE