Aberdeen makes case for active fixed income investing
Fixed income investors would be better served taking an active approach in the current environment of elevated volatility, according to Aberdeen Asset Management.
An active approach can help weather difficult market conditions and enhance returns, the manager stated.
“Actively managing fixed income enables managers to adjust the credit quality of a portfolio according to industry or sector prospects and economic growth projections, and to compensate for risks," said the head of Aberdeen's Australian fixed income team, Victor Rodriguez.
“Being able to distinguish good quality credit securities from lesser or bad quality credits — or conducting due diligence on the credit quality of issuers — is at the core of the investment process of a disciplined active manager,” he said.
Because fixed income benchmarks are inflexible, passive or index investors are obliged to purchase stocks that are vulnerable to sentiment-driven trends and market swings and the companies or governments that issue the most debt, according to Aberdeen.
Credit selection is also important to investment returns because returns from credit securities are negatively skewed. If the issuer of a credit security defaults, investors can lose the entire principal, Aberdeen stated.
New bond issuers are able to time the release of an issue and its maturity to exploit favourable market conditions and obtain cheaper funding, often at the expense of constrained passive investors who have no choice but to accept the bonds.
Finally, limiting investments to holdings within an index can limit the returns investors can potentially obtain, whereas delegating the investments to an active manager removes those constraints and enables the exploitation of market opportunities, Aberdeen said.
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