Defensive fixed income checklist
What should you look for in a defensive fixed income manager? We’ve put together a checklist to aid in your decision.
Look beyond labels – not all fixed income is defensive
✓ Positive absolute returns: Targets positive returns irrespective of market direction, particularly in adverse market environments.
✓ Tight volatility control: Maintains low performance volatility through varied market environments.
✓ Minimal correlation to equities: Maintains reliably low correlation to equities, particularly when equity markets incur losses.
✓ Highly liquid: Maintains reliable liquidity, particularly in periods of market stress, so investors can readily access capital when needed.
Two added bonuses that are relevant for defensive investments would be:
✓ Inflation protection: A long term risk of holding cash or low yielding government bonds is erosion of purchasing power if the interest earned doesn’t keep up with inflation.
✓ Tail risk protection: While low correlation to equity markets is a good starting point for defensive investments, an even better next step is the inclusion of strategies that explicitly profit from tail risks.