Factors Can Help in Bond Investing. But Choose Carefully
KEY TAKEAWAYS
Investing in bonds doesn’t have to mean settling for either low expectations or high risk. Our research suggests that systematic approaches to structuring portfolios, more common in equity investing, may well be the future of bond investing.
Using both portfolio and statistical, or regression-based approaches, we tested many variables to determine what information, if any, they provide about cross-sectional differences in expected corporate bond returns.
Consistent with prior empirical evidence, we find forward rates continue to be the most reliable and useful metric for identifying these cross-sectional differences.
A bond investor’s options today may seem like having to choose between a rock and a hard place. Either settle for low expectations in terms of what you may earn on a bond, or try to reinstate yesterday’s fixed income returns by reaching for yield earned through additional risk.
But what if there’s a third way to structure bond strategies? One that acknowledges interest rate levels yet realizes they are only part of the fixed income story? And one that harnesses what’s best about systematic approaches while relying on well-established inputs and daily flexibility to manage risks and increase expected returns? Our research suggests that such systematic approaches may well be the future of bond investing.
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Factors Can Help in Bond Investing. But Choose Carefully
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) with its primary place of business in the state of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. References to registration with the SEC do not imply any endorsement or approval of the qualifications of the firm, nor do they imply that the firm’s representatives have attained a particular level of skill or training. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.
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