A recent study released by Russell Investments Canada Ltd. (Russell Canada), recommends a broader, more active approach to position fixed-income portfolios to navigate both higher and lower interest-rate expectations.
Fixed Income – Unconstrained, authored by Shailesh Kshatriya, associate director, client investment strategies at Russell Canada, suggests that while bonds continue to play a pivotal role in reducing overall portfolio volatility, the current environment presents an opportunity for Canadian investors to take an “unconstrained” approach.
This new approach removes domestic barriers imposed by a traditional benchmark, allowing skilled investment managers to capitalize on their best ideas globally and may be more suitable for protecting principal. This approach can be an effective complement to an existing core fixed-income holding or act as a strong diversifier within a multi-asset portfolio.
“We believe traditional active strategies which aim to outperform a broad fixed-income benchmark can be complemented by a dynamic and unconstrained approach,” said Kshatriya in the new report. “Russell Canada believes an absolute return-oriented fixed-income strategy may help generate more consistent returns in a secular rising rate environment by allowing manager skill and “alpha” to be the primary return drivers.”
The report goes on to stress the importance of diversifying more broadly into global bonds and sectors as well as into new currency approaches.
Kshatriya describes the diversification challenge facing today’s domestically focused Canadian fixed-income investors, magnified by high corporate issuer concentration and the fact that Canada represents less than 3% of outstanding global debt.
The report concludes by detailing aspects of a credit- and duration-agnostic, total return approach to fixed-income investing and providing simple scenario analysis.
Recently, Russell Canada completed a series of enhancements to its Russell Core Plus Fixed Income Pool intended to offer clients a more diversified fixed-income approach. Renamed the Russell Global Unconstrained Bond Pool, the Pool now includes new sub-advisers, an expanded investment mandate and a Russell positioning strategy.