With the macroeconomic environment becoming more uncertain, investors should be prepared for, and be able to adapt to, several potential outcomes in 2025.
Expanding the opportunity set by adopting a global approach can provide fixed income investors with several important benefits. For those based in Europe or Asia who currently only invest in their domestic markets, this expanded opportunity set includes the US - the world’s broadest and deepest fixed income market.
Beyond the simple increase in the number of securities available, investors can also benefit from the reality that the risk and return drivers for this larger investment universe are multifaceted and often varied. For example, there is frequently variation between economies and therefore markets in terms of inflation, the underlying macro environment, and the stage within the cycle.
These differences mean the ability of active global fixed income managers to build robust and diversified portfolios is extremely strong. This is because variation can reduce the correlation between global fixed income sectors, which can often be very low or at times even negative.
It is vital a manager understands these relationships so they can capture the best investment ideas and implement them into portfolios in a risk-aware manner. It is not enough, nor is it prudent, to simply identify an attractive opportunity and then construct a portfolio without understanding how those ideas work together, or how correlated they are.
