State Street Global Advisors is introducing a suite of fixed income strategies that take a data-driven, systematic approach to generating excess return over a standard fixed income benchmark. We are collaborating with the Barclays Quantitative Portfolio Strategy team (QPS), an organization that has long been recognized as a market leader in fixed income quantitative research. Systematic fixed income portfolios can offer several benefits:
In this piece, we discuss why “now” for systematic active fixed income, how our collaboration with Barclays QPS came about and what our existing capabilities can offer in this space.
To start with, the trading environment for fixed income has become much more transparent and efficient, largely driven by the rise of electronic trading networks (ETNs). Rich information about individual bonds, their pricing, liquidity, risk characteristics—most of the data that could influence security returns—is now readily available.
In the past, the fixed income market was inefficient, opaque, and rife with opportunities for mispricings. Traders could generate alpha by spotting obvious security mispricing, homing their execution skills, or leveraging their broker-dealer relationships. Today, with the growth of ETNs, portfolio trading and exchange traded funds (ETFs), much of the incremental alpha available from trading inefficiencies has been squeezed out. It makes sense for us to help our clients explore opportunities in systematic approaches that are looking to generate alpha another way. Specifically, systematic approaches thrive on the availability of data and market transparency.
We also note that interest in fixed income systematic strategies is growing among investors (Figure 1), and larger investors are driving demand for systematic fixed income strategies.
Figure 1: Investor Demand Is Rising
Our exclusive collaboration with Barclays QPS is an exciting way for clients to access this opportunity because it pairs our leadership in portfolio construction and implementation with QPS’ excellence in quantitative research. We have closely liaised with QPS for over two decades, as our position as a large index manager has allowed us to interact with them about constructing fixed income indices, as well as engage with them on index developments. We have been using QPS’ index expertise since we began managing fixed income in 1995. Barclays QPS has 14 analysts, most of them PhDs, who have an average tenure of 18 years.
Each day, Barclays QPS provides us with comprehensive quantitative issue-level signals through custom systematic strategy indices that are put through a risk-controlled optimization process with the aim to maximize the portfolio signal and ultimately generate alpha. This process allows us to take advantage of data from both equity and fixed income markets to identify superior risk/return opportunities.
We believe that systematic active fixed income is aligned with our heritage in Indexed Fixed Income. In Building a Portfolio: A Closer Look at Our Process, we discussed sampling, which is a major part of the construction of both indexing and systematic strategies. Sampling, or selecting alternative bonds in an optimized portfolio that have similar risk exposure but better liquidity and pricing requires deep skill and experience that we have garnered as an index manager of over $500 billion in fixed income index AUM.
In this new, highly efficient, and more transparent bond market, we think that investors should look closely at their traditional, fundamental active corporate bond exposure. A systematic approach to credit selection casts a wider net when seeking opportunities, as it evaluates the entire security universe when considering opportunities versus their more focused fundamental research-driven one. This suits a trading environment that is tilted toward electronic and basket trading and allows clients to benefit from scale efficiencies.
Important Risk Disclosure
State Street Global Advisors Worldwide Entities
For institutional / professional investors use only.
Investing involves risk including the risk of loss of principal.
Information Classification: General
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The views expressed are the views of Arkady Ho through August 4, 2023, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward- looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected.
Diversification does not ensure a profit or guarantee against loss.
Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
Barclays is not affiliated with State Street Global Advisors Funds Distributors, LLC.
Barclays Index License Disclaimer
Neither Barclays Bank PLC (“BB PLC”) nor any of its affiliates (collectively “Barclays”) is the issuer or producer of the products referenced herein and Barclays has no responsibilities, obligations or duties to investors in such products. The Barclays Indices referenced herein (collectively, the “Indices”), together with any Barclays indices that are components of such Indices, are trademarks owned by Barclays and, together with any component indices and index data, are licensed for use by State Street Global Advisors as the producer of the products referenced herein (the “Product Provider”).
Barclays’ only relationship with the Product Provider in respect of the Indices is the licensing of the Indices, which are administered, compiled and published by BB PLC in its role as the index sponsor (the “Index Sponsor”) without regard to the Product Provider or the products referenced herein or investors in such products. Additionally, State Street Global Advisors as Product Provider may for itself execute transaction(s) with Barclays in or relating to the Indices in connection with such products. Investors acquire such products from the Product Provider and investors neither acquire any interest in the Indices nor enter into any relationship of any kind whatsoever with Barclays upon making an investment in such products. The products referenced herein are not sponsored, endorsed, sold or promoted by Barclays and Barclays makes no representation regarding the advisability of such products or use of the Indices or any data included therein. Barclays shall not be liable in any way to the Product Provider, investors or to other third parties in respect of the use or accuracy of the Indices or any data included therein.
Barclays intends to engage Bloomberg Index Services Limited as the official index calculation and maintenance agent of the Indices, which are owned and administered by Barclays. Bloomberg Index Services Limited does not guarantee the timeliness, accurateness, or completeness of the calculations of the Indices or any data or information relating to the Indices. Bloomberg Index Services Limited makes no warranty, express or implied, as to the Indices or any data or values relating thereto or results to be obtained therefrom, and expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect thereto. To the maximum extent allowed by law, Bloomberg Index Services Limited, its affiliates, and all of their respective partners, employees, subcontractors, agents, suppliers and vendors (collectively, the ‘protected parties’) shall have no liability or responsibility, contingent or otherwise, for any injury or damages, whether caused by the negligence of a protected party or otherwise, arising in connection with the calculation of the Indices or any data or values included therein or in connection therewith and shall not be liable for any lost profits, losses, punitive, incidental or consequential damages.
Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
This communication is directed at professional clients (this includes eligible counterparties as defined by the appropriate EU regulator) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.
Past performance is not a reliable indicator of future performance.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
© 2023 State Street Corporation.
All Rights Reserved.
Exp. Date: 08/31/2024