Global Fixed Income Opportunities

A systematic approach to total return credit portfolios

In line with declining yields, and a maturing credit cycle, the need for diversi fication and risk management of fixed income portfolios has again increased. To address this need, we propose the Global Fixed Income Opportunities portfolio (GFO): a total return-focused fixed income strategy targeting a return

of 4-6% annually across the business cycle while providing fixed income investors diversification from duration driven sell-offs as those seen in 2013, 2016 and late 2019. The strategy incorporates a systematic management of both duration and credit risk. In contrast to traditional fixed income investing where focus is on security selection and limited duration tilts, our emphasis is on managing the portfolios according to the market and macro outlook, shifting the allocation from only high grade bonds and typically 5-7 years

duration to higher levels of credit risk in high yield and emerging market bonds, with shorter portfolio duration of typically 3-4 years. To manage these shifts we rely on our Dynamic Market Portfolio investment process, using

behavioural finance-driven algorithms to decide when the portfolio allocation is changed.

These portfolios are built around a well-diversified fixed income portfolio, set

up to deliver attractive risk adjusted returns across the cycle. The problem facing portfolios containing more than 50% in high yield bonds is that they tend to see very significant sell-offs when the business cycle outlook deteriorates. In contrast to this,

high grade bonds with longer duration perform well during such periods. Unfortunately, they offer very low yield going forward, and they tend to incur long lasting drawdowns (losses) when the macro outlook improves and monetary policy biases tighten. To counter these effects and benefit from the changing macro environment, we actively manage the portfolio’s risk level, by moving the portfolio allocation from safe and stable bonds to more risky credit, in line with the changing outlook for financial markets as measured by our behavioural finance inspired positioning algorithms.