Fixed Income investors are not getting what they bargain for when they allocate to benchmarks, research shows.

Inadequate exposure to credit and liquidity premia and poorly optimised yield curve allocation are typical in fixed income benchmarks, providing investors who allocate to them with suboptimal allocation to income, the research highlights.

Furthermore, typical fixed income benchmark allocations don’t achieve their objectives in a 60/40 balanced funds because they provide insufficient defensiveness, the research shows.

Through analysis of the Bloomberg Australian Composite 0+ maturities index, recent research by Stephen Hannaford, AMP Capital’s Senior Portfolio Manager – Macro – Global Fixed Income, shows demonstrated the inefficiencies of the benchmark, whether it be as a standalone investment or in context of a balanced fund investor.

Hannaford’s study is the final paper in a three-part series published following AMP Capital’s bi-annual Global Fixed Income Research Forum. You can access the previous papers here and here.

“Allocation to this benchmark naively allocates to duration and spread risk according to market averages – which change over time – rather than taking into account the objectives and constraints of the investor and the different characteristics of fixed securities,” Hannaford comments.  

In this paper Hannaford develops a flexible framework for constructing fixed income reference portfolios taking account of the inefficiencies of the fixed income benchmark and the objectives and constraints of different investors. He demonstrates the application of this framework for a hypothetical balanced fund investor.

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