Opportunities prevail in fixed income despite challenges: Zenith
Global fixed interest managers are facing challenge in maintaining performance as a result of the prevailing volatile market conditions stemming from divergent central bank policies, Zenith Investment Partners reports.
Zenith head of multi-asset and income research, Andrew Yap, said the firm's Global Fixed Income Sector Review, showed that despite the challenging conditions, there were opportunities for fixed income managers to outperform traditional benchmarks through the use of active strategies that span rates, curve, sector rotation and credit.
"Zenith highlights two recurring themes which shaped the outcomes of many sector participants; a divergence in global monetary policy, and dislocations in high yield," he said.
"With regard to the former, global fix income managers sited difficulties in correctly forecasting the US and European interest rate cycles, with many positioned for a rising rate environment and further normalisation in the global term structure."
Yap said such views were commonly enacted through negative or low duration strategies, relative to traditional fixed interest benchmarks, which contributed to underperformance.
"Many sector participants also retained a meaningful allocation to the high yield sector, believing an improving US economy would be the catalyst for further compression in credit spreads", he said.
"However, in the wake of a free fall in crude oil, an abrupt and significant widening in credit spreads produced material losses in high-yield, with the troubled commodity-related sector faring the worst.
"An increased use of portfolio protection and tail hedging strategies has also occurred, in a bid to combat the recent resurgence in market volatility.
"Zenith believes these strategies can enhance portfolio outcomes by guarding against capital losses.
"However, such strategies are not without a cost and must be analysed sufficiently as there may be instances where they perform in a manner inconsistent with the intended purpose."
AUTHOR
Nicholas O'Donoghue
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