Most fixed income investors have a relatively simple view of investing which consists of two key objectives. Being repaid in full at maturity or being paid a sensible regular income for taking the risk of lending to said borrower for the duration. Obviously, fixed income investing is more complicated than this simplistic analysis, but what emerges is that fixed income investors have a different attitude towards risk.
For equity investors, risk is arguably opportunity. While no-one likes their stocks to be volatile, big moves up and down can represent huge opportunity. Fixed income investors, by contrast, are far more risk-averse. They invest in an asset class that has traditionally – though not recently – had lower levels of volatility, and smaller maximum drawdowns. And the language of fixed income is saturated with measures of risk such as bond ratings or credit default swaps. In simple terms, risk matters more to bond investors, especially when eyeing emerging market debt (EMD)...
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full article, click here.
