The potential benefits of multi-asset over siloed fixed income management, and why we think asset allocation should be a bottom-up as much as a top-down process.

The fixed income universe is remarkably diverse and complex. In our view, the standard practice of separating fixed income allocations into several asset-class silos not only prevents investors from investing in the relative value opportunities that result from this complexity, but actively contributes to them. We believe managing fixed income under one umbrella, with high flexibility over asset allocation, can enable investors to take advantage of the market’s diversity and inefficiency.

In this paper, we present the case for a multi-asset approach to fixed income and credit, and argue in favor of allowing asset allocation to evolve primarily as a result of bottom-up credit analysis and security selection, rather than being determined solely from the top down.

Executive Summary

  • Different fixed income asset classes have exhibited wide dispersion in their periodic returns, and frequently change position in the “league table” of returns.
  • Similar dispersion can be seen even within asset classes: six-month relative returns frequently diverge by 10 percentage points or more for different credit quality (e.g., CCC versus BB high yield) and for different regions (e.g., U.S. versus European high yield or U.S. high yield versus emerging markets debt).
  • Further asset allocation opportunities are available via yield-curve positioning and capital-structure positioning (via hybrid securities).
  • We believe this complexity results in mispricing and alpha opportunity, and that the practice of separating fixed income allocations into several silos and requiring often lengthy decision-making processes to make asset allocation adjustments to those silos not only prevents investors from taking advantage of mispricing, but actively contributes to it.
  • We believe asset allocation should evolve primarily as a result of bottom-up credit analysis and security selection, rather than being solely determined from the top down: a predominantly top-down approach raises the likelihood that securities are selected only for the sake of filling the asset allocation buckets, creating unwanted idiosyncratic credit risk that needs to be diversified away and diluting exposure to the market’s best opportunities.

The Diversity and Asset Allocation Opportunity in Fixed Income

De-Siloing Your Fixed Income Portfolio

Source: FactSet, Neuberger Berman. Total returns, unhedged. Data as of December 31, 2023. Indices used: ICE BofA Global High Yield, JPMorgan EMBI Global Diversified, ICE BofA Global Corporate, ICE BofA U.S. ABS & CMBS, ICE BofA U.S. Agency, ICE BofA U.S. Municipal Securities, ICE BofA Global Government, ICE BofA Global Inflation-Linked Government. Cash is represented by U.S. dollar 3-month Libor.

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