Fixed Income Investment Process
Similar to the equity portion of your portfolio, Fourth Quadrant’s process for fixed income require several decisions:
- Which type of fixed income ETFs: Government, Corporate, Municipals, etc?
- What mix of foreign and domestic is appropriate?
We continually monitor the global fixed income markets to determine what combination of securities provide the best mix of return potential and risk mitigation. The order of operations is similar in nature to the stock investment process, but some of the specific drivers and decision criteria vary.
There are numerous variables assessed before deciding what subset of fixed income to own, including, but not limited to:
- Interest rate risk
- Call and pre-payment risk
- Reinvestment risk
- Credit risk (default, spread and downgrade)
- Event risk
- Yield curve risk
- Exchange rate risk
- Purchasing power risk
- Liquidity risk
Below are a few examples of potential actions based on anticipated changes in interest rates and credit trends:
| EXPECTATION |
POTENTIAL ACTION |
Interest Rates Rise |
Buy Shorter Duration Fixed Income |
Credit Spreads Widen |
Buy Fixed Income with lower Credit Risk |
USD Strength |
Sell Foreign Fixed Income |
Liquidity Plentiful |
Buy Fixed Income with Higher Credit Risk |
|
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