Absolute return fixed income strategies look for other sources of returns beyond changes in interest rates, such as relative value and non-traditional income orients assets. Short positions can also be taken with the aim of generating positive returns even if markets are falling. A wide range of asset classes can be utilised in absolute return fixed income investing allowing for portfolio diversification. Capital allocations can be structured in such a way that capital can be moved away from declining markets to those with greater return potential.

Returns from traditional fixed income investing are very dependent on changes in interest rates. When yields are very low, investors do not only receiving little by way of income, but the value of their portfolios can be at risk if interest rates rise. Absolute return strategies offer an alternative to traditional fixed income investing.

Why Absolute Return Fixed Income?

• Absolute return fixed income can be used as an investment solutions during periods when interest rates in developed markets are at low levels.
• During periods of economic slowdown, developed market central banks are likely to maintain extraordinary monetary policy until economic growth accelerates meaningfully, which means interest rates typically remain low with the aim of stimulating economic growth. Absolute return fixed income can be an attractive investment solution for investors seeking greater returns from their investments than they would get from tradional fixed income investing during periods of economic decline or stagnation.
• Once the economy rocovers and there is some growth, central banks will typically increase interest rates, exposing fixed income investors to potential losses.
• Absolute return fixed income strategies look for other sources of return beyond changes in interest rates, such as relative value and non-traditional income oriented assets. They can take short positions with the aim of generating positive returns even in a falling market environment.  
• The variety of assets that the strategies can access means that there is little correlation with any particular asset class. This should add diversification to any portfolio.  
• A focus on an absolute return regardless of broader market movements should also lead to lower volatility.
• Many fixed income funds attempt to produce returns superior to a benchmark index. For fixed income, the index constituents whose weight is increasing in the index are often the ones whose risk is increasing.
• If a particular asset class is performing poorly, investors in funds that track the index will be obliged to participate in the poor returns.
• In an environment in which interest rates are likely to stay low for an extended period and then eventually rise, a reliance on traditional fixed income investing is unlikely to produce returns above inflation.
• An absolute return strategy can search for returns from a wider array of asset classes, offering not only diversification but also the ability to allocate away from areas that are expected to decline and towards those with greater return potential.

Risk Associated with Absolute Return Fixed Income

Market risk: the value of assets in the Portfolio is typically dictated by a number of factors, including
the confidence levels of the market in which they are traded.

Operational risk: material losses to the Portfolio may arise as a result of human error, system and/or
process failures, inadequate procedures or controls.

Liquidity risk: the Portfolio may not always find another party willing to purchase an asset that the
Portfolio wants to sell which could impact the Portfolio’s ability to meet redemption requests on
demand.

Exchange rate risk: changes in exchange rates may reduce or increase the returns an investor might
expect to receive independent of the performance of such assets. If applicable, investment techniques
used to attempt to reduce the risk of currency movements (hedging), may not be effective. Hedging
also involves additional risks associated with derivatives.

Custodian risk: insolvency, breaches of duty of care or misconduct of a custodian or sub-custodian
responsible for the safekeeping of the Portfolio’s assets can result in loss to the Portfolio.

Interest rate risk: when interest rates rise, bond prices fall, reflecting the ability of investors to
obtain a more attractive rate of interest on their money elsewhere. Bond prices are therefore subject
to movements in interest rates which may move for a number of reasons, political as well as economic.

Credit risk: The failure of a counterparty or an issuer of a financial asset held within the Portfolio to
meet its payment obligations will have a negative impact on the Portfolio.

Derivatives risk: certain derivatives may result in losses greater than the amount originally invested.

Counterparty risk: a party that the Portfolio transacts with may fail to meet its obligations which
could cause losses.

Emerging markets risk: emerging markets are likely to bear higher risk due to lower liquidity and
possible lack of adequate financial, legal, social, political and economic structures, protection and
stability as well as uncertain tax positions.

High yield risk: high-yield instruments, meaning investments which pay a high amount of income
generally involve greater credit risk and sensitivity to economic developments, giving rise to greater
price movement than lower yielding instruments.