Better Beta Smooths Returns

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    Better structuring beta in fixed income portfolios can help smooth returns over time, says Erin Bigley, senior portfolio manager, fixed income at AllianceBernstein. In the session ‘The Future of Fixed Income Investing’ at its ‘Canada Institutional Investment Symposium,’ she said government bonds are currently very expensive and while they are having a pretty good year this year, there are challenges ahead. Yields are down and durations are extending which means investors are getting less compensation for more interest rate risk. One challenge is liquidity. At the heart of the 2008 financial crisis no-one wanted to buy fixed income. That has not changed with banks pulling back and no longer making markets. However, investors should consider better structuring beta in their portfolios and expanding the bond universe by sector and geography. They can also create better beta by creating a better balance between interest rates and credit. This smooths returns as yields rise and fall with GDP. However, when returns are higher, so is volatility. So better beta needs to be paired with tail risk hedging, designed to buffer portfolios during extreme market events. Since this can be very expensive with bond portfolios, investors need to look for other assets that are highly correlated and less expensive such as currency or corporate and sovereign bonds.