A Core Fixed Income Solution: Outperforming the Agg, But with Minimal TEV
In this case study, we explain how systematic active fixed income (SAFI) was used in practice to enhance a client’s core fixed income strategy. Our client was able to achieve high-quality fixed income exposure with a stronger risk/return profile than the Bloomberg US Aggregate Index (the Agg).
Scenario
Our client, a consultant, had clients invested in the Agg. The clients were looking for ways to outperform the Agg, but with limited tracking error volatility. The client’s objectives were alpha of +25-50 basis points (bps), with modest tracking risk.
Summary of Analysis and Recommendations
In a “building block” approach, we used our Systematic US Investment Grade Corporate Bond Index (with modestly expanded constraints beyond our base SAFI investment grade configuration) as the corporate “sleeve” of the Agg, and we combined it with Agg index exposure for the remaining sleeves. We were able to meet the client’s return objectives. This is a strategy we have introduced as the Systematic Enhanced Core Bond Strategy.