What is a Core Fixed Income Strategy?

Jim B.

Core fixed income strategy is an investment strategy that focuses its investments on fixed income instruments, like bonds, that are generally safe and still provide solid value. This is done by concentrating on investment-grade bonds, which generally carry very little risk of the bond issuer defaulting on payment obligations. Partaking in a core fixed income strategy requires looking at the bond market for inefficiencies and closely studying the operations of the institutions offering bonds. Such a strategy may not offer exceptional returns, but it is suited for those seeking long-term growth of their investment capital.

Core fixed income strategies focus investments on fixed income instruments like bonds.
Core fixed income strategies focus investments on fixed income instruments like bonds.

The typical fixed income instrument is a bond, which is essentially a loan given by the investor to the institution issuing the bond. As a return on his investment, the investor receives regular interest payments at a predetermined rate and also eventually gets back his initial payment for the bond. Bonds represent relatively stable investment opportunities as opposed to stocks, which cannot make any promises of regular income to investors. One way to emphasize the stability of bonds is through the core fixed income strategy, which protects capital while still seeking out opportunities to grow it.

At the heart of most core fixed income strategies are investment-grade bonds. These bonds are given high bond ratings by credit agencies, which means that the issuers are generally assured of fulfilling their repayment obligations. Bonds that lack such high ratings are labeled junk bonds, which have to offer high interest rates to investors as a way to offset the risk of default.

Another important facet of the core fixed income strategy is the realization that not all investment-grade bonds are equal. For example, government bonds are usually backed with treasury money and are generally safe, but the interest they return is minimal. On the other hand, there are some corporations that offer bonds that are rated as investment grade, and these corporations can offer much more competitive interest rates to their investors. Investment-grade bonds that offer value can make this strategy more than just a safety net for capital.

Investors who partake in a core fixed income strategy should realize that the lessening of risk also means that big, quick profits are also unlikely. This strategy generally requires patience and a long-term commitment of capital for it to reach fruition. Those who have that patience can come out of the strategy with their initial capital commitment intact and may emerge with a solid return on their investment as well.

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