Financial Literacy

Hedging currency or foreign exchange (FX) risk is a key decision for any manager running a diversified fixed income portfolio. Currencies are inherently volatile, so whether and how FX risk is managed can have a material impact on a portfolio’s risk and return profile.

Corporate hybrids are a type of bond issued by companies – they are known as hybrids because they combine certain features of debt and equity.

Roll-down is the capital gain created by the natural fall in a bond’s yield as it approaches maturity. As a fixed income investor, it is probably the most you will ever get paid for doing nothing.

Fixed income managers always want to have the flexibility to look for the best value across their investment universe, and in our view they therefore need the capacity to buy bonds in different currencies.

Bids Wanted in Competition (or BWIC) lists are a unique characteristic of the ABS and CLO markets, where they are widely used in secondary trading when investors are looking to sell bonds.

The goal of income investing is to ensure that your portfolio generates a steady source of revenue regardless of market conditions.

Inflation is widely understood to be bad for bonds. Fundamentally, this is because inflation erodes the value of the coupon and principal payments that fixed rate bondholders receive in the future.

Asset-backed securities (ABS) are a type of bond, typically issued by banks or other lenders. What makes ABS different to conventional bonds, such as government or corporate bonds, is that they are ‘secured’ against a diversified pool of loans with similar characteristics.

Additional Tier 1 bonds (AT1s) are part of a family of bank capital securities known as contingent convertibles or ‘Cocos’. Convertible because they can be converted from bonds into equity (or written down entirely), and Contingent because that conversion only occurs if certain conditions are met, such as the issuing bank’s capital strength falling below a pre-determined trigger level.

Collateralised Loan Obligations, or CLOs, are bond instruments issued to fund a specific pool of loans, typically senior secured or ‘leveraged’ loans, to companies. The bonds are split into tranches that can carry different ratings (and yields) according to how senior they are in the CLO’s capital structure, normally from AAA notes at the top to equity notes at the bottom.