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Why Fixed Income?
by Madeleine Coetzee - Friday, 30 August 2013, 04:37 PM
 

By: Albert Botha, Portfolio Manager and Quantitative Analyst, Atlantic Asset Management

British philosopher, logician, mathematician and historian Bertrand Russell wrote once on “Useless Knowledge.”  One of the central themes in this piece was that there existed no such thing.

“I have enjoyed peaches and apricots more since I have known that they were first cultivated in China in the early days of Han Dynasty”, he wrote.

To many people, to understand and appreciate fixed income, seems a waste of precious time.  In reality, entering the fixed income world can be both vital and rewarding for those who try.  Investors often forget that the dynamics in the fixed income market underlies a lot of what happens in other markets.

Government debt, the financing of the fiscus and the compiling of the budget lies squarely in its ambit.  Countries can and have been ruined by the actions of investors.  Poor decisions by policy makers are punished and many politicians quickly realise that those with the purse strings often need to be heeded.

James Carville once said, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

In similar ways companies often have their fortunes affected by the bond market.  Funding cost change.  Discount rates vary.  Alternatives become more attractive.

It is also important to remember that the risks in fixed income are not apparent or as easily recognisable as those in alternative funds, a better understanding for terms like duration or credit risk can reduce the possibility of surprise when things go wrong.

Lastly, one of the many maxims in investments is that diversification is key.  All the asset classes should be options for advisors and their clients and yet if an advisor does not feel comfortable in his knowledge they will avoid what could be a lucrative opportunity.

Fixed income is an essential asset class in the investment toolbox.  Perhaps it is time to pick it up.

 


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