An Introduction to Unconstrained and Absolute Return Fixed Income
Some of our most popular short papers on the fixed income investment process cover the subjects of either absolute return fixed income, or unconstrained fixed income investing.
It may be argued that asset allocators have always considered fixed income as "absolute return" investment, viewing the asset class as providing a steady income stream together with return of capital, providing long-term diversification from risky assets.
The term "absolute return" can mean different things to different people, depending on the context. It will normally mean one of two things (or a combination of both):
- A strategy which is uncorrelated to indices, and dependent upon manager skill
- A strategy which provides downside protection in the event of a market decline
Within the fixed income asset class, absolute return investing is a subset of "unconstrained Fixed income" (given that the term "unconstrained" describes the opportunity set, but not the objective of the fund. Unconstrained fixed income strategies not only have a "go anywhere", benchmark-ignoring approach, but often also have greater freedom to use derviatives, either to protect capital or to generate alpha.
White papers on unconstrained fixed income investing
Here are three of the most viewed:
This six page paper from JP Morgan defines unconstrained and absolute return fixed income investing and then goes on to explore the different sources of risk within a fixed income portfolio, the different expressions of risk, and how these may be measured, managed and hedged.
The report specifies the expected characteristics of a credible and robust, absolute return, fixed income strategy process.
Another six page report, from 2014, which describes the main varieties of unconstrained fixed income strategy currently in use. The paper examines and seeks to explain the inner workings Total Return Fixed Income strategies, Absolute Return Fixed Income strategies and Multi-Asset Credit strategies.
The authors stress the important of careful manager selection and due diligence when deciding upon choice of fund manager, given the higher level of complexity for these strategies.
This 2014 paper explores a new Russell Absolute Return Fixed Income strategy, designed particularly to meet the investment objectives and constraints associated with non-profit asset owners.