Customised fixed income portfolios: Why systematic processes have an edge
Fixed income portfolios have always been customised. But as sustainability objectives, liquidity requirements and risk budgets add to traditional constraints, how can investors preserve the intended risk and return profile? Dr Harald Henke, Principal Investment Strategist Fixed Income, explains why systematic processes have an edge.
Dr. Harald Henke
Principal Investment Strategist Fixed Income
Key takeaways
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Constraints interact: One restriction can reshape risk, return, liquidity and costs.
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Breadth preserves opportunity: A broad universe helps rebuild exposures after exclusions.
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Measurement matters: Systematic processes quantify trade-offs before implementation.
Customisation should be measurable, not just possible
Customisation has long been integral to institutional fixed income investing. Today, however, mandates extend far beyond duration, ratings, sectors and benchmarks. Investors increasingly combine these traditional guidelines with sustainability objectives, climate targets, liquidity requirements, risk budgets, turnover limits and tailored reporting.
Each constraint can affect much more than its immediate target. As the paper’s example of excluding energy bonds illustrates, removing a sector may also change carry, duration, spread exposure, credit quality, liquidity and expected alpha. Replacing securities sequentially can solve one problem while creating another elsewhere in the portfolio.
A systematic process addresses these interactions simultaneously. It combines broad universe coverage with security-level forecasts, risk models, liquidity and transaction-cost estimates, and client-specific constraints. Diversified exposures to factors such as value, quality, momentum and carry can often be rebuilt across other eligible securities. Quoniam’s internal model calculations show that even when restrictions substantially reduce the investment universe, expected alpha potential can often be retained to a much greater extent.
This does not mean that customisation is cost-free. Some requirements create meaningful trade-offs in terms of alpha, risk, liquidity or implementation costs. The advantage of a systematic framework is its ability to measure and explain these effects before implementation. For investors, the key question is therefore not simply whether a customised mandate is possible, but whether its consequences are transparent and the resulting portfolio remains aligned with its intended purpose.
