Exploring The Benefits Of Global Fixed Income For U.S. Investors

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Investors continue to grapple with historically low U.S. interest rates and the exposure they should take in portfolios to U.S. Aggregate benchmarked fixed income. While a shift to dedicated sector exposure such as high yield credit or more unconstrained mandates may offer a potential solution, some investors may feel that this removes a key consideration for holding fixed income in a diversified portfolio, namely the ability to generate returns in turbulent periods where equities or other risk assets may be underperforming. In other words, investors may want a structural allocation to high quality duration in their portfolios but at the same time may be worried about holding that duration in U.S. investment grade rated bonds.

We believe that increased exposure to international fixed income offers investors a number of benefits, particularly when the volatile effects of currencies are hedged. We believe that moving from a U.S. only based approach to a Global approach offers the following benefits:

  1. Diversification benefits since global interest rates don’t move fully in tandem with U.S. interest rates, hence reducing overall volatility.
  2. A larger opportunity set for active managers to produce much higher levels of both excess return and information ratios (particularly when currencies are hedged).
  3. The ability to participate in markets where international Central Banks may be easing, despite a U.S. Federal Reserve which may soon be tightening policy.

This paper will briefly examine each of these considerations.

 

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