Systematic Fixed Income

CHAPTER 11Putting It All Together

OVERVIEW

Our final chapter is a short one. Our journey through the book started with a discussion of the size of fixed income markets and the (currently) small presence of systematic investors in fixed income. Might a systematic approach be successful? The book has introduced the various tools for modeling expected returns, risks, liquidity, and ultimately building portfolios in a systematic manner. A systematic approach could be successful. We also discussed how incumbent fixed income managers have, as a group, beaten their benchmarks, but have done so by leaning into traditional risk premia rather than security selection. In this chapter we will discuss how a well‐implemented systematic approach may beat a benchmark and do so not by loading up on traditional market risk premia, but, instead, via security selection opportunities. A well‐implemented systematic investment approach can be a powerful diversifier.

11.1 WHAT MIGHT A SUCCESSFUL SYSTEMATIC FIXED INCOME INVESTING PROCESS LOOK LIKE?

Let's examine the return properties of representative systematic fixed income portfolios. We will look at many of the active fixed income categories examined in Chapter 4. These portfolios are hypothetical representations of what might be possible from well‐implemented systematic portfolio construction (i.e., putting together everything we have discussed throughout the book). Revisiting the investment cube, this means mastery of the front face of the cube ...