By DailyAlts Staff

While central banks around the globe are likely to remain accommodative in 2015, the Federal Reserve is widely expected to begin raising rates sometime later this year. U.S. bond yields are expected to rise along with related interest rates, causing the prices of U.S. bonds to fall as a result.

The European Central Bank (ECB), by contrast, is still engaging in monetary stimulus, a subject we will learn more about when the ECB president Mario Draghi holds his press announcement on Thursday of this week. Although interest rates in the eurozone are incredibly low, they are likely to go lower still. Even 0% isnt a floor in Europe, as negative interest rates have already arrived in Switzerland and Germany, and could take up residence in other EU-member states if necessary. Remember, Draghi has said he would do whatever it takes to save the euro.

In light of these factors, Allianz Global Investors has published a whitepaper titled Active Management in Fixed Income: Conviction is Key . In the view of the papers author Massimiliano Maxia, investors must have conviction in an actively managed strategy in order to successfully navigate todays global fixed-income environment. By conviction, Mr. Maxia means holding true to ones strategy even amid temporary downturns; but in order for that conviction to not be misplaced, investors must first perform thorough due diligence to ascertain the strategys effectiveness in working towards their investment objectives.

Passive management, with results tracking the low-yielding benchmarks, is unlikely to produced positive returns in the foreseeable future, particularly when measured against inflation. For this reason, Mr. Maxia, a fixed-income product specialist, examines three actively managed fixed-income strategies, listed below in ascending order of discretion:

• Core
• Diversified
• Absolute return

While the paper take a European view of investing, the approaches that Mr. Maxia describes can be applied to the U.S. market in the same way that he looks at the strategies from a European market viewpoint.

Core Strategy

Core fixed-income strategies feature portfolios that are very well-diversified across an investment universe, but their degree of freedom is limited; and as a result, their TE (tracking error) from the broad-market benchmark is normally not very high. Since benchmark rates are expected to be very low or even negative in real (inflation-adjusted) terms, a low TE isnt desirable.

Diversified Strategy

Diversified fixed-income strategies differ in their more global approach. With a greater degree of freedom and discretion, diversified strategies are also able seek returns outside the limited universe of broad-market benchmark components.

Diversified strategies thus normally consist of a combination of core strategies, as above; along with satellite strategies, which include sectors such as high yield, emerging-market bonds, convertible bonds, and currencies. These satellites can significantly increase a portfolios return in some market phases, and having the flexibility to shift allocations to and from satellite strategies is a great advantage of the diversified approach.

Absolute Return

While diversified strategies have considerably more discretion than core strategies, they are still measured against low-yielding benchmarks. Absolute-return strategies, by contrast, think outside the box and abandon the benchmark.

Benchmarks by their very nature limit investment options, and this is no environment in which investors should be limited, in Mr. Maxias view. Instead, active interest-rate management is an essential element in the new environment of risk-on and risk-off markets.

Conclusion

After reviewing the three approaches to active fixed-income investing, Mr. Maxia unambiguously exhorts investors to act. He encourages them to abandon the crowded field of passive benchmarking, since todays low-yield environment will not deliver the returns investors need; and to assume the flexibility of global investing in order to take advantage of a global investment opportunity set.

Beta returns in the fixed-income sector will be low for the foreseeable future, in Maxias view, and that puts an emphasis on alpha. Expanding ones investment universe increases the number of opportunities for capturing alpha, which is why fixed-income investors should consider exploring globally diversified or absolute-return strategies going forward. Once an active strategy has been chosen and implemented, investors should have conviction and stay the course, since the strategies are designed to perform over a full market cycle.