I’ve been thinking a lot lately about translations. Not languages, though. Ideas.
People who implement market views with stocks have historically hesitated to implement their views via bonds.
Why? Because it’s hard to build bond portfolios by hand, one bond at a time. In the old days, if an investor had a view on corporate bonds, they’d have to research, price and source the bond themselves (potentially hundreds of times over, in order to achieve diversification). And if, for example, the investor wanted to shift out of corporate bonds and into another market, they’d have to research and build the new portfolio, not to mention go through the hassle and cost of liquidating the original portfolio of corporate bonds.Ima
Creating and managing a portfolio of hundreds of bonds is not easy. It doesn’t serve as great fodder for interesting dinner conversation, either. As a result, many investors turned to active mutual fund managers to outsource their fixed income exposure – rather than having a view themselves, they relied on the manager to have a view for them.
However, with the advent of fixed income ETFs, investors are starting to build fixed income portfolios on their own. Fixed income ETFs offer many of the same benefits as mutual funds (like diversification), with added transparency and liquid access.
In addition, investors are discovering that they do have a view on fixed income, enough so that they don’t wish to outsource it to someone else. Because the thing is, if you have a view on the market, then you have a view on fixed income. I’ll explain.
Let’s say you believe that the economy is starting to recover. As applied to equities, an investor might buy high beta stocks, consumer cyclicals, or growth stocks. In fixed income, that same view means buying high yield corporates, investment grade corporates, or commercial mortgage backed securities. Same idea, just applied in a different asset class.
Here are a few more examples:
The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.
The bottom line? Regardless of your market views, you now have the ability to implement them in both equities and fixed income. No translation necessary.