Fixed income solutions

The aim when investing in fixed income is to preserve your wealth, while generating a steady and predictable stream of income. As the name would suggest, fixed income securities pay investors a fixed amount on a predetermined schedule. Bonds are the most common type of fixed income security, and are issued by both companies and government entities to finance day-to-day operations.

Fixed income investments can offer several important benefits to investors:

• Diversification: Adding fixed income securities to a portfolio can help diversify it and reduce its overall risk, as bonds typically behave differently to other investment instruments like equities.
• Risk reduction: Fixed income investments are deemed less risky than stocks, as the issuer is contractually obliged to meet the income payments and repay the principal sum on the redemption date. In the event of bankruptcy, fixed income instruments also sit higher up the capital structure than equities. This means that the issuer will meet its debt obligations before looking after its shareholders.     
• Liquidity: Many fixed income securities are highly liquid and can be easily bought and sold in the market.

While fixed income securities are deemed less risky than equities, there are still some key things to look out for:

• Interest rate risk: When interest rates go up, bond prices go down. This is because, in the new higher rate environment, new bonds will be issued on more attractive terms. As such, investors looking to sell their existing bonds will need to do so at a discount in order to compete.
• Inflation risk: When investors buy a bond, they commit to tying their money up for a set period of time. If inflation is high or rises during the lifetime of the loan, its value will be eroded and their money will have less purchasing power when it is repaid on the redemption date. Inflation also erodes the purchasing power of the income earned.
• Credit risk: When you invest in a business or government, there is always a risk that they will go bankrupt and fail to repay the loan. Furthermore, if they run into difficulties, they may struggle to meet interest payments and default on their obligations. Fixed income investors should carry out thorough credit analysis before buying a bond to make sure the issuer is financially sound.
• Market risk: If an investor is unable to hold a bond until maturity and needs to sell it on the secondary market, price fluctuations resulting from the overall performance of financial markets could lead to losses.

“Investment grade credit” is a term used to describe corporate bonds issued by high quality companies with a low risk of default. The different rating agencies (Moody’s, Standard & Poor’s and Fitch) use slightly different definitions.

• Moody’s: Baa3 or higher 
• Standard & Poor’s and Fitch: BBB- or higher

High quality government bonds issued by the likes of the US Treasury, the German federal government and the Bank of England are deemed low risk. As they are backed by the government, they are incredibly unlikely to default.

In periods of economic turmoil, government bonds are typically supported by more accommodative central bank policy and “safe-haven” buying. As such, they generally fare well during periods of crisis or recession.

Historically, the high yield asset class has been able to generate high and steady income for investors willing to take on some additional credit risk. These higher coupon payments can help cushion price volatility and mitigate downside risks. 

Credit or default risk is the primary risk for high yield bonds, and can result in losses due to an issuer’s inability to meet interest payments or to repay the principal sum. For this reason, thorough credit analysis is an important part of an active manager’s process when investing in these securities.

Emerging markets issue debt in both their local currency and in foreign currencies – usually US dollars.

• EM local debt: This refers to debt securities issued by sovereigns or corporates in their local currency.
• EM hard debt: This refers to debt securities issued by sovereigns or corporates in other currencies.

Depending on their investment strategy and risk tolerance, investors may decide to pursue one type of investment over the other. For example, hard currency strategies are sometimes deemed less volatile than local currency strategies, as they are exposed to less currency risk. However, local debt strategies can offer the potential for attractive returns.

Private credit is an asset class that can generally be defined as non-bank lending. The private credit market typically serves borrowers that are too small to access public debt markets or that have unique circumstances and require a private lender. 

Private markets offer the opportunity for investors to diversify their portfolios to meet objectives. Furthermore, private credit investments typically offer enhanced income opportunities relative to public market assets. This is to compensate investors for the additional credit and liquidity risk compared to investment grade public debt securities.  

Strategic bond funds are products with flexible mandates, investing across a broad range of fixed income asset classes. The investment teams that manage these products can dynamically evolve their asset allocation as markets change.

ESG considerations can enhance an investment process by introducing another layer to the assessment of investment risk and opportunity. For example, let’s focus on the environmental aspect of “ESG” for a moment.

All sectors will need to decarbonise if the world is to achieve its net zero targets by 2050. And, as we move towards a net zero world, winners and losers will emerge as some businesses flourish and others fail to adapt. Companies that are ill-prepared or incompatible with the new economy could suffer defaults, losses and impairments. Meanwhile, those that are ahead of the curve could secure an attractive competitive position relative to peers.

Our active teams integrate ESG considerations in their fundamental research processes, carrying out their own proprietary assessments and using Invesco’s in-house ratings tool. This allows them to fill in any gaps left by holes in the third-party data. Engagement and dialogue are important parts of the process.  

Our passive capabilities incorporate ESG considerations through positive and negative exclusions and, where holdings overlap, benefit from the engagement activities carried out by our active fixed income teams.

Yes, we’re continually developing innovative solutions to help our clients express their values in their fixed income portfolios. Our ESG strategies are grouped into four categories: 

1. Screened/exclusionary. Industry sectors or companies excluded to avoid risk or better align with ESG objectives.
2. Responsible. Certain companies or industries intentionally avoided based on ESG characteristics.
3. Sustainable. Certain companies or industries intentionally selected based on ESG characteristics to target a sustainable outcome.
4. Impact. Includes objective to generate intentional, measurable, and beneficial social or environmental impact, above and beyond the financial objective.