Seeking Income? Taking a Scientific Approach to Fixed Income Investing
“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.
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.
Active scientific fixed-income investing offers investors a compelling, third alternative—and complement —to traditional passive or active discretionary strategies by:
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.
The portfolio optimization process is driven by proprietary tools and seeks to:
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.
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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.
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