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Investing Ideas
Factor Investing in Fixed Income Markets
A factor-based approach to investing has long been applied to the equity markets, but the merits of factors span across asset classes.
Key Takeaways
- A factor-based approach to investing, which has long been applied to equity portfolios, may also enhance the properties of fixed income portfolios.
- Style factors, such as value, quality, momentum, low volatility, and carry, are individual asset characteristics that have been proven drivers of security risks and returns.
- There are many ways to define style factors, and the metrics used to target them can differ significantly both across and within asset classes, thus leading to varied results.
- Macroeconomic factors, such as interest rates, inflation, credit spreads, and economic growth are broad economic variables that also influence the risks and returns of securities.
- Combining factor exposures may help investors enhance returns and mitigate risks through greater diversification.
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Factor investing in fixed income markets
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Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) The fund may invest in lower quality debt securities that generally offer higher yields but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Lower quality bonds can be more volatile and have greater risk of default than higher quality bonds. Leverage can increase market exposure and magnify investment risk.
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