SPONSORED FEATURE Q What fixed-income strategies have been popular in the past few years? A For conservative investors, US Department of the Treasury and government agency or govern- ment-sponsored enterprise bonds – such as the Federal Home Loan Bank, Small Business Administration, Fed- eral Home Loan Mortgage Corp or Government National Mortgage As- sociation – are popular. US govern- ment backing and liquidity makes these investments attractive. Large institutions, foreign governments and banks invest in these securities for capital preservation. Then there are municipal bonds, which are issued by state and local municipalities. These bonds may be issued for particular projects (reve- nue bonds) or may be backed by the entire tax base of the municipality (general obligation bonds). Generally, municipal bonds are considered conservative invest- ments. While the overall health of the municipal market has greatly improved in recent years, some mu- nicipal issuers are not performing as well in the current environment. This is due to isolated instances where state or local governments are having difficulty balancing their budgets, are dealing with under- funded pension obligations or are facing other issues. Sovereign bonds are debt secu- rities issued by a national govern- ment, most often referencing coun- tries outside of the US. Germany, Australia and Canada are examples of countries with a AAA rating, the highest level of creditworthiness. The US was downgraded from AAA by Standard and Poor’s in 2011, but remains AAA rated by the other ma- jor rating agencies. These countries tend to have wealthy, diversified and adaptable economies, which supports their capacity to repay debt. Countries with lower ratings in- clude Brazil, Argentina and Greece, all of which have struggled to meet their financial commitments. Given significant differences in creditwor- thiness, the risk and return associat- ed with sovereign debt varies great- ly. Therefore, investors should do their homework before investing. Corporate bonds are issued and backed by companies. The ratings of corporate bonds are assigned based on the company’s financial condition and trends. Much like sov- ereign debt, the range of creditwor- thiness among corporate borrowers is wide. Therefore, investments in this category run the gamut from very safe to speculative. The majority of the corporate bond market is publicly traded and liquid. However, direct lending has become an increasingly popular strategy among private fund man- agers, involving lending directly to borrowers who cannot access bank loans. Finally, asset-backed securities (ABS) are bonds collateralised by a pool of assets such as student loans, automobile loans, home equity loans or credit card receivables. ABS are similar to mortgage-backed se- curities, which are popular among some hedge fund managers. These assets are pooled and securitised, freeing capital for the loan origina- tor while allowing investors to di- versify and access a unique stream of income. These investments have the potential to provide higher re- turns than traditional fixed-income offerings. Q What is the difference between fixed income and equity? A Generally, fixed-income securi- ties provide a steady stream of income versus equity, which may or may not offer dividends. Typically, dividend yields are lower than in- terest payments for a given issuer. Fixed income, in theory, has lower risk because debt has a preferential position over equity in a liquidation. Some fixed-income securities may have a convertible feature that brings them closer to equity. A con- vertible bond can be converted to Fixed-income investing in 2020 Sal Shah and Jeff Layman of BKD outline fixed-income investment strategies being used in recent times Jeff Layman BKD Jeff Layman has worked in investment management since 1987. As chief invest- ment officer and chair of the BKD Wealth Advisors Investment Committee, he develops and oversees the firm’s investment process, including asset allocation strategies and investment selection for affluent families and institutions. He is a Chartered Financial Analyst (CFA) charterholder. The CFA charter is obtained by successfully completing a three-year programme with studies in equity analysis, fixed-income analysis, portfolio management, accounting, economics, derivatives and ethics. Sal Shah BKD Sal Shah is an audit partner with more than 25 years of experience serving a full spectrum of investment management entities, including hedge funds, private equity funds, venture capital funds, mutual funds, fund of funds, collateral debt obligation funds, foreign currency, structured products, mortgage-backed assets trading and securitisation companies. He has served alternative investment clients ranging from start-ups to $25bn in asset under management. Shah can be reached on 646-253-5193 or at [email protected]. 24 HFM.GLOBAL 12 FEBRUARY 2020