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Fixed Income and StyleADVISOR

Nov 5, 2012 Marc Odo

The question is often asked how to best analyze fixed income products using StyleADVISOR. First and foremost, it is worth noting that all of the return analytics - the benchmark comparisons, the modern portfolio theory statistics, the universe comparisons, etc. - are every bit as relevant when looking at fixed income strategies as they are with equity products. The question then becomes, “Of all the analytics StyleADVISOR offers, which is the most relevant to fixed income?”

When answering this question, I believe it is important to understand the role of fixed income within an investor’s portfolio. For most investors, the investment grade fixed income allocation is regarded as the “safe” portion of their investments. They are not expecting to lose money with their bond investments. Therefore those statistics measuring capital preservation, like Pain index, Pain ratio, and maximum drawdown are the most relevant when analyzing fixed income.

Certainly metrics that measure different types of risks, like volatility risk or benchmark-relative risk, are important, but I think the risk of simply losing money is the most important to most fixed income investors. With that in mind, we have built a template tailored to fixed income analysis.

The first page starts simple with returns versus the benchmark for a variety of time periods. The second page goes into the return-vs-risk trade-offs. The emphasis here is on capital preservation- did the investment lose money? How much money was lost? How frequently was money lost? How quickly did the investment recover its losses?

This is followed up with a universe comparison, and then if you are subscribed to the Morningstar Extended Fields database, many portfolio-based qualitative measures. Next are two types of scenarios or market cycle analyses. The first examines how the fund has historically performed in periods of rising or falling interest rates, the next analyzes performance in periods of widening or tightening credit spreads.

Finally we include a number of pages on the broad fixed income market, tapping Zephyr’s deep well of fixed income indices. The fixed income markets are broken out by issuers, credit quality, and maturity structure. We hope you like this template and find it useful.

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