Non-Traditional Fixed Income Opportunities

Explore common multi-asset fixed income approaches, including Core, Core Plus, Multi-Sector, and Unconstrained fixed income strategies. A non-traditional fixed income allocation can complement Core and Core Plus strategies, act as a standalone fixed income solution for those wanting to add more portfolio risk, and serve as a substitute to equity strategies.

Updated December 9, 2024

Highlights

Investors are increasingly turning to non-traditional fixed income strategies as a way to complement their traditional Core and Core Plus portfolios.
Non-traditional approaches, such as Multi-Sector and Unconstrained Fixed Income, may provide investors with enhanced returns, higher yield, diversification, flexibility, and exposure to unique asset classes.
Non-traditional strategies can be wide-ranging in scope, resulting in a high degree of uncertainty around their risk and return profile. Investors must be prudent when allocating to the space and should understand the risks associated with the different non-traditional fixed income approaches.
A well-managed Multi-Sector approach with a focus on risk management that balances interest rate risk with credit risk can be well-suited for investors seeking to enhance risk-adjusted returns and income over the long run.

Common Multi-Asset Fixed Income Approaches

Traditional

Core Fixed Income

Core fixed income strategies are often managed against a common benchmark, such as the Bloomberg US Aggregate Index. The opportunity set is often constrained to index-only constituents, which includes a meaningful allocation to U.S. Government securities and excludes non-investment grade rated securities. Duration is typically managed close to the benchmark, resulting in moderate interest rate exposure that approximates the overall fixed income market. The result is a lower risk strategy that can provide modest outperformance vs. the Bloomberg US Aggregate Index (~0.50% to 0.75%).

Core Plus Fixed Income

Core Plus strategies are similar to Core mandates but include “plus” sectors. Plus sectors are out of index sectors and often incorporate non-investment grade securities. Two common examples of plus sectors are High Yield Corporates and Emerging Market Debt, with most strategies allowing up to 40% of their portfolio in plus sectors. Core Plus strategies often employ derivatives and modest leverage, and duration is managed relative to the benchmark, similar to Core mandates. Core Plus strategies have a higher risk compared to Core but have provided excess returns over time that have been almost double that of Core strategies (~1.5%) (Figure 1).

Figure 1. 10 Year Risk/Reward | as of 09/30/2024

Source: Fort Washington and Nasdaq eVestment. Date range: 09/30/2014–09/30/2024.

Non-Traditional

Multi-Sector Fixed Income

Multi-Sector fixed income strategies provide investors with non-traditional exposure to fixed income markets with enhanced and differentiated returns compared to traditional fixed income. Multi-Sector strategies are similar to Core Plus approaches but often have dedicated Plus exposures that can make up the majority of the portfolio at times, and with much less exposure to U.S. Government securities. As a result, multi-sector strategies are generally shorter duration than traditional mandates as shown below (Figure 3). Multi-Sector approaches also have more discretion over duration exposure compared to traditional approaches but typically don’t take active duration positions. Although Multi-Sector strategies have broad flexibility in management of the portfolio, they often have clearly defined objectives that mainly focus on credit risk. As a result, Multi-Sector strategies are higher yielding compared to more traditional strategies, with the median fund yielding 5.7% compared to 4.2% for the Bloomberg US Aggregate Index¹ (Figure 2). Multi-Sector funds may generate excess returns of 2% to 4% compared to the Bloomberg US Aggregate Index.

Unconstrained Fixed Income

Unconstrained fixed income strategies are often labeled "go-anywhere" funds. Due to the manager's full discretion over exposures in these strategies, they involve added risks that can deviate significantly from traditional fixed income strategies. These strategies can take large positions in credit, currency, and equity markets and are typically managed on an absolute basis, not relative to a universal benchmark. A common feature of unconstrained strategies is their ability to take large duration bets, including negative duration. Figure 3 illustrates the wide duration ranges of Unconstrained strategies compared to common multi-asset fixed income strategies.

Figure 2. Yield to Worst	Figure 3. Effective Duration
	[AWAITING CHART]
Source: Fort Washington and Nasdaq eVestment. Data is as of 09/30/2024.

Risks & Benefits Associated With Non-Traditional Approaches

Benefits

Portfolio Diversification	Core and Core Plus strategies are primarily invested in the major index sectors of Investment Grade Corporates, Securitized, and Government Securities. Non-traditional approaches provide dedicated exposure to diversifying asset classes such as High Yield, Emerging Markets Debt, Preferreds, and non-index Securitized sectors such as ABS, CMBS, and CLOs.
Enhanced Return	Multi-Sector bond strategies have historically outperformed traditional strategies.²
Higher Yield	On average, Multi-Sector funds provide yields in excess of the Bloomberg US Aggregate of 2%. With the recent rise in bond yields, the total return potential for multi-sector funds is attractive for fixed income investors and compares favorably against other non-fixed income asset classes when considering risk/reward.
Flexibility	Having the flexibility to react to market dislocations in a timely manner is a benefit of non-traditional fixed income approaches. Their agility and ability to take positions in various sectors and instruments is an important aspect of generating alpha.
Expanded Opportunity Set	Core and Core Plus strategies are largely invested in index-only sectors and securities. Multi-Sector and Unconstrained approaches venture beyond index sectors into areas that may be less trafficked, providing more opportunities for outperformance.

Risks

Interest Rate Risk	Unconstrained strategies often make large bets on the direction of interest rates, which traditionally have proved to be unreliable sources of return in for portfolios. This can leave investors with significant credit risk and limited downside protection.
Credit Risk	Multi-Sector and Unconstrained funds often have higher credit risk compared to traditional approaches. Plus sectors, such as High Yield and Emerging Markets Debt, can be up to 100% of the portfolio, compared to 40% for Core Plus.
Diversification	Concentrated risks can pose issues for investors in Unconstrained funds, which often take outsized positions in various markets, including credit, currency, equity, and interest rates.
Risk/Reward Uncertainty	Unconstrained funds have limited restrictions around their fund objectives and guidelines, resulting in high uncertainty around their risk and return profile and what investors can expect over time.

Summary of Non-Traditional Approaches

Where Do Non-Traditional Approaches Fit In an Investor's Portfolio?

Non-traditional fixed income can complement Core and Core Plus strategies. Traditional strategies have clearly defined objectives, and their risk/return profiles come with a higher degree of expectation. An allocation to non-traditional fixed income can provide valuable benefits to a fixed income portfolio, including enhanced returns, higher yields, and uncorrelated returns while only increasing risk marginally.

A non-traditional fixed income allocation can also serve as a standalone fixed income solution for investors. Those looking to add more risk to their portfolio while maintaining the traditional benefits of fixed income can make non-traditional fixed income a principal component of their overall fixed income allocation. The flexibility and agility allowed within non-traditional approaches take the place of asset allocation decisions by investors, becoming an all-in-one fixed income solution.

Finally, investors can use non-traditional fixed income as a substitute for equity strategies. Investors hesitant to allocate to equity late in the cycle, but in search of higher returns, can turn to non-traditional fixed income as a possible solution.

How Is Fort Washington's Strategic Income Different?

Introduction to Strategic Income

Download Non-Traditional Fixed Income Opportunities

Download Non-Traditional Fixed Income Opportunities

View PDF

Sources

¹eVestment US Multi-Sector Fixed Income universe as of 09/30/2024.

²Morningstar Multisector Bond Universe and Intermediate-Term Bond Universe as of 09/30/2024.

IMPORTANT DISCLOSURES

This publication has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information and statistics contained herein have been obtained from sources believed to be reliable but are not guaranteed to be accurate or complete. Neither Fort Washington nor its sources for the content herein are responsible for any damages or losses arising from the use of this information. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of Fort Washington. Past performance is not indicative of future results.

Introduction to Strategic Income

Explore Fort Washington's Strategic Income Strategy, designed to provide investors with a high level of current income and total return while focusing on capital protection with differentiated returns compared to traditional fixed income.

Introduction to Strategic Income

Stones in calm water with evening sun with horizon. Tranquil scenery.

Managing Risk the Fort Washington Way
A comprehensive risk management framework is at the heart of our investment philosophy. This article explores the principles and the values that drive Fort Washington’s belief that the measurement of risk and return, not forecasting, should drive investment decisions.

Lighthouse searchlight beam through marine air at night photo.

Risk Budgeting Applied to Fixed Income
At the core of Fort Washington's risk management framework is the use of a risk budget. Our risk budgeting process is made more efficient and consistent through our measure of credit risk, Index Equivalent Spread Duration.

Portfolio managers discussing analysis with profit from the screen stock on the computer in the office.

Enhancing Risk Management With IESD
The significance of risk management at Fort Washington drove the development of our proprietary credit risk metric, Index Equivalent Spread Duration (IESD). This piece explores how Fort Washington integrates IESD into its risk management framework to enhance portfolio performance and mitigate credit risk effectively.

An Innovative Approach to Measuring Spread Risk
Index Equivalent Spread Duration adjusts for two effects not addressed by spread duration—the tendency of riskier bonds to experience larger spread moves and the tendency of short maturity bonds to demonstrate more spread volatility than long maturity bonds. This piece explores how Fort Washington captures these effects by applying a spread and maturity beta to a bond’s spread duration.

Liquidity & Yield: How Cash Segmentation Can Optimize Cash Holdings
A cash segmentation strategy, implemented through collaboration with an experienced asset manager, provides a structured approach to managing cash reserves. This article explores how institutions can benefit from such a strategy, the steps involved in the process, & the role of experienced asset managers such as Fort Washington Investment Advisors.

Ten dollar bill in water. Liquidity concept.

Are You Optimizing Your Cash?
As organizations grow and needs become more complex, cash and liquidity management are often overlooked. Partnering with an experienced active asset manager can help organizations navigate market alternatives & optimize cash holdings.