What is unconstrained fixed income
An unconstrained – or ‘go anywhere’ - approach is benchmark-agnostic with portfolio construction generally based on growing income and capital without reference to an index. This provides the potential flexibility to capitalise on opportunities across the fixed income spectrum as and when they arise.
The focus is usually on aiming for risk-adjusted returns. In other words, trying to achieve a potential return for a given level of risk. It may therefore form a core bond portfolio for investors seeking moderate capital growth and income.
Why consider total return investing?
There are two components of the total return from a fixed income portfolio: yield – or income return from coupons – and capital growth of the assets over time.
Some bond investors focus only on the income element but in recent years historically low government bond yields are making it harder for traditional fixed income strategies to generate adequate income from lower-risk investments. Simply chasing higher yields may cause investors to ignore increasing risk in the portfolio.
Total return investing is a more holistic approach that considers both income return and capital return, rather than an individual component. Income received by the portfolio can be reinvested back into the underlying assets with the aim of maximising total return.
An unconstrained approach can lend itself well to generating potentially attractive total return. With the focus on flexibility and diversification, unconstrained fixed income investing aims to seek out opportunities for both income and growth across a broad range of fixed income securities while balancing the risks of different assets.
Fixed income comprises a variety of sub-asset classes. Different bonds potentially have different performance and risk drivers. Performance of each sub-asset class is correlated to a different part of the economic cycle. The economic cycle is in constant motion so a portfolio needs to be able to adapt.
An active, unconstrained approach to fixed income investing can have the flexibility to use dynamic asset allocation and effective diversification to try and capture different performance drivers at the right time, while managing the associated risks.
Our total return fixed income strategy
As an unconstrained, flexible strategy it can allocate across the global fixed income universe (government bonds, inflation linked, investment grade credit, high yield and emerging market debt) and seeks to respond to different stages of the market cycle and allocate accordingly.
The investment process is based on our proprietary framework which breaks down the global fixed income universe in a simple and transparent way, according to risk factor sensitivity. The portfolio allocates across three risk buckets – defensive, intermediate and aggressive – allowing the Manager to adjust the portfolio's allocation depending on the market environment, to help mitigate risk.