IDX Dynamic Fixed Income Strategy

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The IDX Dynamic Fixed Income strategy (“DFI”) offers flexible yet targeted exposure to multiple sectors of the fixed income market.

Our systematic, quantitative research drives dynamic portfolio rebalancing that seeks high current income via intelligent, diversified fixed income exposure.

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Investment Case for Dynamic Fixed Income

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Adapt to a New Era of Fixed Income

MAR 7, 2024

Reasons to Invest

Dynamic

DFI allocations are dynamically adjusted to effectively adapt in changing market conditions or interest rate regimes.

Diversified

DFI offers diverse fixed income exposure, encompassing U.S. government bonds, corporate bonds, high yield bonds, bank loans, TIPS, and international bonds all in one trade.

Data-Driven

Our transparent, risk-focused strategies are based on rigorous algorithms that harness big data for emotionless investment decisions.

Strategy objective

The IDX Dynamic Fixed Income strategy seeks to provide high current income and total return while mitigating downside risk.

FAQ

We believe in the potential for better returns, better diversification and better risk management: Active fixed income strategies can adapt to changing market conditions and adjust their holdings, accordingly, providing a potential advantage over passive strategies that follow a fixed index. This also means accessing parts of the bond universe that might be overlooked or underrepresented by a “broad” index: For example, high yield corporate bonds and bank loans can offer a compelling risk-adjusted return, however, these sectors are ignored by the indices such as the Bloomberg Aggregate Bond Index. This also means that an active approach has the potential to protect capital during periods such as rising interest rates when duration sensitive bonds are most at risk.

The appeal of earning 5% in risk-free short duration treasuries is an obvious one.It ignores, however, the fact that

(i.) 5% cash isn’t going to last for ever and

(ii.) Tbill’s may not represent the best opportunity within the bond universe.

There’s no problem in seeking the safety of a relatively high return on T-bills, but understand that this has been more of a medium-term “trade” vs. a permanent “allocation”. Further, capital markets have proven to be efficient over time, and higher real yields in T-bills have historically only existed for short to intermediate periods within larger debt cycles .

 

The Bloomberg US Aggregate Bond Index (the “AGG”) was designed in the 1980s and is based on a rule-set that has not evolved with the bond market.

The Agg is weighted towards issuers with the most debt (which inherently poses heightened credit and duration risks within its investment methodology).

The Agg is concentrated in government or government-backed bonds and largely (or entirely) ignores high yield bonds, bank loans, non-agency MBS, etc. which we believe eliminates important opportunities for generating yield within the fixed income ecosystem.

Liquidity management is of paramount importance for investors- especially in fixed income as bonds have historically been less liquid than equities. Given the advent of massive fiscal and monetary stimulus in the last decade, bond volatility has been relatively muted and liquidity (for the most part) has not been a systemic issue. We fully believe in the potential for those risks to change going forward.

In particular, funds that trade “cash bonds” during credit or liquidity crunches can at times take several weeks to swap from a high yield corporate bond exposure into cash. For an ETF-only strategy, the added layer of liquidity can result in a more efficient ability to trade portfolio positions to cash, providing the potential for better execution in a portfolios risk management protocol. We believe this is a huge advantage for an actively managed fixed income fund; particularly one that seeks to take opportunistic exposures (both long and short) across the fixed income spectrum.

Many investors are surprised to realize that, since 2020, High Yield bonds (as represented by the iShares iBoxx High Yield Corporate Bond ETF: HYG) demonstrated a higher volatility than the iShares Core US Aggregate Bond ETF (AGG) but HYG also generated a higher return (through Feb 2024), a lower drawdown, and a higher Sharpe ratio than the AGG ETF:

Source: IDX Insights

For decades with secularly declining interest rates, duration risk was muted and Treasury bonds were anecdotally known to “always go up”. This paradigm came to an abrupt halt in 2022 as the Fed embarked on the most aggressive rate hiking cycle in US history. Interestingly, in 2022, duration risk proved to be the bigger of the two risk (vs. credit risk) and didn’t have nearly the recovery in 2023.