Active managers can strategically position their portfolios based on their outlook for market yields. If they anticipate a decline in yields, they might add longer-maturity issues, which are expected to benefit the most from such a scenario. More sophisticated strategies may involve targeting specific segments of the yield curve or varying investments across different maturities. For instance, if credit spreads are relatively uniform across maturities, a manager might overweight credit exposure in shorter maturities while favouring government bonds in longer maturities. This enhances portfolio yield while minimising the impact of any future widening of spreads.

The constituents of a bond index represent a certain level of aggregate credit risk at any given time. Active managers have the flexibility to take on higher or lower credit risk compared to the index. This decision can be influenced by the stage of the credit cycle, average valuations, or a tactical market view. A prime example is the Bloomberg Aggregate Index, which includes both government and corporate bonds. Active managers can adjust their credit exposure by overweighting or underweighting these asset classes based on their relative attractiveness.

Fundamental credit analysis aims to identify securities whose valuations do not accurately reflect the company’s current and future fundamental strength or weakness. When selecting an issuer’s securities, it is crucial to choose those with robust balance sheets and easy access to money markets. Additionally, issuers may need to be stress tested for risks such as litigation, new regulations, environmental or social factors, and potential mergers or acquisitions.

Whole industry sectors in fixed income markets can sometimes have valuations that do not reflect the current or future strength or weakness of their constituent companies. This is often due to the sector experiencing a slightly differentiated economic cycle than the broader market. Additionally, some industry sectors may become overleveraged relative to others, making them less attractive to active managers. Importantly, active managers have the flexibility to avoid investing in sectors where they believe the outlook is concerning.

Unlike equities, fixed income investments generally have a fixed maturity date. As they approach this date, the issuing sovereign or company often needs to return to the market to refinance the debt. They may also issue new debt for various reasons, such as funding growth or  acquisitions. In the corporate world, issuers often offer new debt at slightly higher yields than the market to attract buyers – a phenomenon known as new issue premia. Active managers can capitalise on this by keeping a close eye on opportunities in primary issuance markets.

When an investor buys an equity, the process is typically straightforward, with a single class of share to purchase. However, when an investor buys a bond, a single corporate issuer may have a range of debt issues across different maturities and currencies, each with different legal documentation, and even exposed to different parts of the capital structure. Each issue may be a different size, with variable levels of liquidity. This fragmentation introduces a range of options for an active manager to consider. For example, an investor might decide to target a higher yield by purchasing the lower-rated subordinated debt of a large corporate issuer. Although the risks are higher in the event of a default than if the investor bought a higher-rated issue, the investor may judge that the substantial size and strong market position of the corporation significantly mitigates this risk.

The value of fixed income instruments can fluctuate across markets or between segments of the fixed income universe at any given time. For instance, a large US company may issue bonds in US dollars, Japanese yen and euros, with the spread varying depending on the currency of issue. Active managers can capitalise on these variations by overweighting the credit in the market that offers the greatest value and underweighting the credit in the market that offers the least value. Notably, these strategies can be used not just to outperform a specific benchmark or index. They can also be used by active fixed income managers seeking to generate an absolute, positive return through different market conditions.