SCOTT A. RICHARDSON, PhD, is a Director at Acadian Asset Management, leading the systematic credit business. He is a professor at London Business School and has held senior positions at AQR Capital Management and BlackRock (Barclays Global Investors). He is an editor of the Review of Accounting Studies. Dr. Richardson earned his Ph.D. in Business Administration from the University of Michigan.

Preface xiii

Acknowledgments xv

About the Author xvii

Chapter 1 Setting the Stage 1

1.1 What is fixed income? 1

1.2 How big are fixed income markets? 3

1.3 What does it mean to be systematic? 8

1.4 Which fixed income markets will this book focus on? 15

1.5 Commonly used fixed income analytics 17

1.6 Other fixed income considerations 24

References 28

Chapter 2 Fixed Income - Strategic Asset Allocation 29

2.1 What are the key drivers of fixed income security returns? 29

2.2 What traditional risk premia can be harvested in fixed income? 36

2.3 The strategic diversification benefit of fixed income 50

2.4 Is the strategic diversification benefit of fixed income threatened in a low-interest-rate environment? 54

References 55

Chapter 3 Fixed Income - Tactical Asset Allocation 57

3.1 Market timing - term premium 57

3.2 Market timing - credit premium 70

3.3 Other considerations 83

References 88

Chapter 4 Incumbent Active Fixed Income Managers 89

4.1 Framework for active fixed income management 89

4.2 US Aggregate (Core Plus) benchmarked fixed income managers 94

4.3 Global Aggregate benchmarked fixed income managers 97

4.4 Unconstrained Bond Funds 100

4.5 Emerging Market fixed income managers 102

4.6 Credit long/short managers 104

References 108

Chapter 5 Security Selection - Rate-Sensitive Assets 109

5.1 What is the investment opportunity set for developed market government bonds? 109

5.2 Reducing the dimensionality 112

5.3 A framework for security selection of government bonds (investment themes) 119

5.4 A framework for security selection of government bonds (level, slope, and curvature) 123

5.5 Extensions 131

References 135

Chapter 6 Security Selection - Credit-Sensitive Assets 137

6.1 What is the investment opportunity set for developed market corporate bonds? 137

6.2 Dimensions of active risk taking within corporate bonds 145

6.3 A framework for security selection of corporate bonds (investment themes) 149

6.4 A framework for security selection of corporate bonds (performance) 158

6.5 Extensions 163

References 170

Chapter 7 Security Selection - Emerging Markets (Hard Currency) 173

7.1 What is the investment opportunity for emerging market fixed income? 173

7.2 A framework for security selection of hard currency emerging market bonds (investment themes) 178

7.3 A framework for security selection of emerging market hard currency bonds (performance) 182

7.4 Extensions 184

References 186

Chapter 8 Portfolio Construction Considerations 187

8.1 Choices in the investment process (design and investment universe) 187

8.2 Choices in the investment model (expected returns) 191

8.3 Choices in the portfolio construction process (optimization, rebalancing, trading) 199

8.4 Other topics 207

References 208

Chapter 9 Liquidity and Trading Considerations 209

9.1 Some context for the liquidity challenges of fixed income assets 209

9.2 Basics for trading credit-sensitive assets 210

9.3 Electronification of trading for credit-sensitive assets 219

9.4 Primary markets - liquidity provision 221

9.5 Secondary markets - liquidity provision 226

9.6 Ancillary topics 228

References 232

Chapter 10 Sustainability 233

10.1 Interest in ESG/sustainability 233

10.2 Sustainable investing with credit-sensitive assets 235

10.3 Sustainable investing with rate-sensitive assets 249

References 256

Chapter 11 Putting It All Together 259

11.1 What might a successful systematic fixed income investing process look like? 259

11.2 Some final thoughts 272

Reference 277

Index 279