Why Systematic Fixed Income Requires Wide-Ranging Expertise

An advanced trading platform also enables efficient implementation across government, credit, municipal and global markets—an important advantage, as systematic strategies often seek to capitalize on relative value opportunities across fixed-income sectors.

Finally, it can facilitate strong market relationships that provide systematic strategies with new-issue allocations, offering critical liquidity and alpha opportunities.

Wider Expertise Can Help Improve Factor Design

Beyond the advantages of a high-tech fixed-income platform, systematic strategies benefit from access to a broad range of investment expertise. Designing an effective factor can be like solving a complex problem and requires experience and insight.

For instance, as part of a collaborative dialogue, a skilled discretionary portfolio manager with a background in global credit markets might help solve for currency timing to enable a cross-currency factor. Currency timing involves comparing bonds issued by the same global companies but denominated in different currencies. This comparison allows fixed-income managers to tilt their portfolios to bonds denominated in the currencies that offer more attractive spreads. Systematic managers can take this type of insight to create factors that are both effective and scalable.

Experienced credit analysts may also provide insights that can lead to improved factor design or the development of new factors.

Take “spread per turn of leverage,” an established relative-value factor that compares bonds’ credit spreads with their issuers’ cash flows versus borrowings. Experienced credit analysts can indicate the sectors where spread per turn of leverage is likely to be either effective or unreliable and suggest how the factor might be modified to allow for different business models.

For example, for a motor parts manufacturer, stable cash flows are a key element in evaluating creditworthiness. In banking and insurance, however, variable income streams from derivatives and other mark-to-market instruments can result in uneven cash flows. In these cases, balance sheet metrics may be more important. Specialist subsectors like property and casualty insurance may need even more industry-specific metrics. These insights can then be tested and, if they prove effective, incorporated into the systematic model.

Custom Mandates May Need Expert Input

Creating customized investment strategies that address specific client needs is easy with systematic fixed-income approaches. Systematic managers can readily simulate custom portfolio behavior, manage against any benchmark and explain performance to underlying factor exposures and other return drivers.

However, selecting the most appropriate benchmark can be more complex—particularly for portfolios targeting specific environmental, social and governance (ESG) objectives, such as carbon-intensity goals. Responsible investing specialists can provide critical input in these cases, both to ensure benchmarks align with stated objectives and to inform the design of ESG-related factors, such as measures of carbon intensity, governance quality or exposure to controversies.

Integrating Broader Resources May Improve Outcomes

In our view, access to advanced technology and to a deep bench of fixed-income experts has multiple advantages for investors, including:

• Lower transaction costs, thanks to trading synergies and liquidity intelligence
• More stable factor exposures and fewer unintended risks
• Consistent portfolio quality, even as the number of accounts and assets under management grow—because systematic methods scale effectively without diluting discipline or risk controls.

The Future of Systematic Fixed Income

We believe that systematic approaches have proved their worth in fixed-income markets. We see the next steps for leading managers as continuous process improvements that further integrate technology and expert insights to help maximize expected returns.