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The changing face of bond investing

Global fixed-income markets are undergoing dramatic change as government bond supply dwindles and corporate bonds take greater prominence. This presents new challenges for fund managers, who can see opportunities to produce higher returns but at higher risk. Recent hard times in the credit markets have created short-term performance headaches. Investors have learnt that avoiding big blow-ups is even more important than spotting winners.

Not so long ago, the world of fixed-income investing seemed quite straightforward for many fund managers, certainly in terms of the areas they were expected to keep an eye on. "In the 1990s there were a small number of assets or asset classes that you had to look at, which were government bonds and currency," says Ceris Williams, head of Fixed income and currency at Rothschild Asset Management in London.

Of course within those parameters there was a full range of countries and currencies with which to contend, each of which in the process brought with it a large number of cross-market plays and convergence trades.

Today, Fixed income investors still see government bonds and currencies as important drivers in adding value. "They are probably the two biggest potential contributors," says Williams. However what should be borne in mind, he adds, is that they are also the two biggest contributors to volatility in portfolios.

The effect of this is that though volatility from these asset classes is substantial and value added is there to be had, the Sharpe ratio (by which a fund manager's skill in producing returns can be measured against the risk taken to achieve them) is not likely to be as good as in the previously less volatile environment.

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