Strategic Risk Management: A Practical Guide to Portfolio Risk Management

CHAPTER 13

Active Global Fixed Income Structure

The same key issues that need to be addressed for global equities should be addressed for fixed income. The most important issues for fixed income are:

• Style—which active strategies are most likely to be rewarded?
• Management structure—specialist managers or broad market managers? Number of managers?
• Market extensions.

STYLE

What Is Style?

Fixed income fund managers add value to the portfolios they manage by using one or more of a series of strategies that are available to them. The strategies are listed next.

• Duration and yield curve forecasting. Managers anticipate the direction of yield movements and therefore whether long-dated bonds will outperform short-dated bonds.
• Country allocation. Managers forecast the relative movement of bond yields in different countries.
• Currency. Managers forecast currency movements.
• Sector allocation. Managers predict the relative movement of sectors.
• Security selection. Managers perform fundamental credit analysis to predict which bonds will outperform others.

Fixed income managers will rely on one or all of these strategies, and this is what is meant by investment “styles” in fixed income. However, a single investment manager typically has a bias toward one style. No single style will outperform others consistently, and performance of different styles is difficult to predict in advance.

One approach is to diversify across the styles. This controls the impact of style bets and improves consistency ...