What is Fixed Income Portfolio Management?
Fixed income portfolio management is a type of asset allocation that includes investing in debt securities. Fixed income securities are also referred to as bonds and they derive their value from being backed by the issuer, such as a government, municipality or corporation.
According to Fintalent’s fixed income portfolio management consultants, the idea behind fixed income portfolio management is quite simple: investors look for stable cash flows and fixed interest rates when building a portfolio of bonds. This ensures that the investor can meet their current needs and those expected in the future with more certainty than if they had invested only into equity markets.
In order to manage these risks, fixed-income portfolios are typically managed based on an analytical approach involving statistical measurements such as return on equity and beta that can be used to determine how risky the portfolio is in comparison with historical levels. A fixed-income strategy can also be classified by factors such as yield curve duration or segmented by asset class using sensitivity analysis.
Fixed-income portfolio management is the practice of managing risks on a fixed-income portfolio. In order to achieve this, multiple financial assets are used to generate income or returns. Variable rate bonds yield less than the yield at that time; therefore, they are higher risk investments as compared to typical interest rate vehicles like savings accounts. The idea of risk management in a fixed-income portfolio was first developed during World War II as part of government policy.
Fixed-income portfolio management can be performed in different ways depending on what type of fixed income product is used. A risk-averse fixed-income portfolio manager may favor more liquid fixed-income products such as treasury bills, while a risk-seeking manager may choose to invest in high-yield bonds.
The process of determining financial returns and fluctuations within a particular segment of fixed income is often referred to as managing fixed income portfolios or managing the risks associated with them. The historical performance of investments can provide important information on how changes in market conditions affect the value of securities and how strategies respond to various macroeconomic conditions.
Most individuals have some fixed-income investments such as bonds and CDs. However, individuals who have a formal portfolio manager typically have a larger fixed-income allocation than individuals who do not. Most institutional portfolios are made up of between 80% and 100% fixed income.
Fixed-income or bond managers are usually divided into two groups: investment grade and high yield investors. They manage the risk in these portfolios by controlling the duration of a bond position or the interest rate sensitivity of their portfolio, which is known as duration risk. The length of time before the principal will be repaid on a bond is referred to as its duration.
A bond fund’s duration can be estimated by computing the weighted average of all its bond durations, which is known as the duration of a portfolio. The duration of a portfolio is inversely proportional to its interest rate sensitivity. As interest rates rise, a long-duration fund will decline in value more than it would if it had less duration exposure. On the other hand, a short-duration portfolio will increase in value faster than it would if it had less duration exposure. By increasing or decreasing their exposure to bonds based on changing market conditions, institutional investors hope to minimize both interest rate risk and credit risk..
When it comes to investing in government bonds, this instrument is referred to as a “sovereign” bond. A sovereign bond is one that is issued by a national government and is used to pay for the nation’s debts. They are considered to be one of the least risky forms of fixed income securities as they are backed by the creditworthiness of a country. Sovereign bonds may also be referred to as “risk-free” because they offer a lower risk and more stable return than that of corporate bonds.
Investors like sovereign bonds because they are all very different in terms of credit, interest rate and currency type. They enjoy the fact that there is a great deal of flexibility when it comes to investing in sovereign bonds, depending on their risk tolerance levels, investment goals and even on where they do business.
When it comes to investing in corporate bonds, these bonds are issued by companies who use the bond proceeds for projects such as acquisitions, mergers, share buybacks and others. This means that the company is borrowing money from its investors in order to invest in a business activity that they believe will increase the company’s value.
Corporate bonds have a great deal of benefits when compared to other types of fixed income instruments. One of the main benefits is that these have higher yields than government bonds and can also be viewed as an alternative source of funding to equity markets. For example, if a company wants to open a new sales office in one of the territories where their products are already distributed, they can use corporate bonds instead of borrowing money from the banks.
In fixed income portfolio management, there are two primary types of corporate bonds that are purchased by investors: investment grade and high yield. Investment grade bonds typically have a credit rating of Baa3 or higher by Moody’s or BBB- or higher by S&P while high yield typically has ratings between Ba1 and Caa3. Depending on the investor, the returns from these kinds of instruments may vary widely. If a company defaults on their payments to bondholders, then all investors that held those instruments will be affected. The most important thing to remember is that there is always a risk of default when investing in any fixed income security.
Before buying corporate bonds, it is important to first research the company’s financial statement and balance sheet to see if they have enough resources to pay back all their bond obligations. Many people may think only large companies can afford corporate bonds but some of the largest corporate bonds are not listed on stock exchanges, which makes them much more difficult to find for small investors that consider themselves “savers”.
