Seeking Income? Taking a Scientific Approach to Fixed Income Investing

October 19, 2021
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Executive Summary

“The scientific method has been the primary means of solving hard problems for over 400 years. We see investing as data-driven decision-making in the face of uncertainty. This challenge can be robustly met via the application of a scientific investment process.”

-Heather DeGarmo Head of Product Strategy – BlueCove Ltd.

The Next Generation of Fixed-Income Investing

Fixed-income markets have evolved considerably over the last 60 years, but innovation has been scarce. The last meaningful innovation was the creation of passive investing in the 1980s. That is—until now. Harbor Capital spent the past two years studying scientific investing generally, and specifically, BlueCove—a scientific asset management firm founded in 2018 as an active manager focused on delivering state-of-the-art, scientific investment processes to fixed-income investment management.

Each of BlueCove’s employees has an equity interest in the firm, and this facilitates collaboration and creates an outcome-oriented environment. All of the firm’s resources are dedicated solely to scientific fixed income. In addition to the firm’s best-in-class qualities, BlueCove’s disciplined investment process offers a unique range of potential benefits for investors reaching further for yield in today’s lower-for-longer yield environment.

What Do We Mean by Scientific Fixed-Income Investing?

Active scientific fixed-income investing offers investors a compelling, third alternative—and complement —to traditional passive or active discretionary strategies by:

  • Stripping the traditional investment process of its weaknesses
  • Reducing the process to its component parts: universe definition, data sourcing, alpha sourcing, portfolio construction, trade execution, and process review
  • Reassembling the process with people and technology assigned to the roles to which they are best suited.
  • Replacing the siloed investment process, dependent upon individual discretion, with a firm-level process focused on process design and improvement.

Benefits of Scientific Fixed-Income Investing

  • The potential to generate returns with a low correlation to those of traditional managers
  • The potential to improve returns by mitigating cognitive and behavioral biases
  • An increased probability of repeatable outcomes
  • A technology-enabled process, harnessing vast datasets to create innovative sources of alpha
  • A transparent, data-driven, self-improving investment process with targeted R&D at each step
  • Minimizes key-person risk, improving knowledge management at the firm level

A Security-Level Bespoke Investment Process

In practice, the investment process seeks to be evidence-based, data-driven and economically intuitive. It’s not a black box. The process involves six steps. Each step, from data collection to trade execution, is subject to a recurring cycle of measurement, improvement, and optimization, aiming to maximize breadth and skill and their application along the entire value chain. Thus, we are able to create solutions with different risk characteristics and exposures, so we can address a variety of investor needs, from absolute or total return to benchmark- oriented products.

Six steps:

  1. Universe Definition. The global credit markets contain approximately 15,000 securities across 3,000 issuers. So, initially we ask—what is the investment universe we want to look at? We define the investment universe in order to focus on the specific instrument type or market that is appropriate for a particular fund or strategy. Various strategies could focus on U.S. high yield or global investment grade or a combination of both, for example.
  2. Data Sourcing. We look to source consistent and reliable data. The amount of data available today, versus even five or ten years ago, is staggering. In fact, as of a year ago, statistics revealed 2.4 billion relevant data points. That number would be exponentially larger today. So, how you access that information and effectively utilize it in the investment process becomes the challenge. Our state-of-the- art, in-house technology allows us to analyze all 2.4 billion+ data points daily, across all of the current strategies employed at BlueCove, including USD high yield, European high yield and investment grade, USD, and EUR credit default swap markets.
  3. Alpha Sourcing. What we consider to be the bread and butter of our decision-making process, we source alpha by developing proprietary, non-generic insights, based on economic intuition, and tested by quantitative researchers. The breadth of the datasets we use allows us to capture efficiencies beyond the scope of more traditional analysis.
  4. Portfolio Construction. Focus on maximizing alpha through optimizing the portfolio construction process, while controlling for risk and minimizing transaction costs.
  5. Trade execution. Engineered to efficiently translate alpha insights into actualization. We access multiple trading platforms with an emphasis on electronic trading.
  6. Process review. We rely on strict, model-version control so we know, at any point in time, what’s driving investment decisions, what’s worked, and what hasn’t worked. Portfolio and decision attribution become an input into the process to drive up iteration improvements on a continual basis.

Scientific Investing Can Add Alpha to Enhance Portfolio Returns

The portfolio optimization process is driven by proprietary tools and seeks to:

  • Maximize alpha forecasts
  • Minimize market, sector, and curve risk
  • Mitigate issuer-concern risk
  • Minimize transaction costs
  • Realistically measure market liquidity

Compared with traditional active discretionary portfolio strategies, scientific investing can help diversify a portfolio by providing greater breadth and liquidity and by limiting unwanted market exposures. A traditionally managed fixed-income portfolio generally has a concentrated number of holdings and is constructed using a conviction-based, bottom-up process with opportunity-driven trading.

In contrast, a scientifically invested portfolio contains highly diversified holdings and is characterized by greater liquidity, risk and cost minimization, and an increased probability of repeatable outcomes, with continuous, incremental trading.


Active scientific fixed income investing offers investors a compelling third choice between traditional active discretionary managers and passive investing. It’s a new source of active returns that can really help diversify a client’s portfolio, particularly in income-based asset classes such as high yield, which is a core part of portfolios today for many investors. Given today’s interest-rate volatility and the uncertainties around the post-pandemic economic recovery, scientific fixed income offers a compelling alternative for income seeking investors.

For more information on scientific fixed income, please visit Harbor Capital | What is Scientific Fixed Income Investing?

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Legal Notices & Disclosures

Past performance is no guarantee of future results. The information shown relates to the past. Past performance is not a guide to the future. The value of investment can go down as well as up. Investing involves risks including loss of principal.

The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice. The information provided in this article is for informational purposes only.

The information provided in this article should not be considered as a recommendation to purchase or sell a particular security. The weightings, holdings, industries, sectors, and countries mentioned may change at any time and may not represent current or future investments.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

Harbor Capital Advisors, Inc.

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