The Fables of Fixed Income.pdf - The fables of fixed income...

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F A B L E S The fables of fixed income. Some wise advice for bond investing.
According to Apollonius of Tyana, a 1st century philosopher, the fable writer Aesop “made use of humble incidents to teach great truths.” Following in this tradition we hope that this simple guide – illustrated by John Devolle – can help anyone to separate fixed income fact from fixed income fiction and encourage them to explore the wonderful and diverse world of bonds. We have been investing in bonds for many years and have witnessed numerous market cycles, the invention of many novel types of bonds, and the rise and fall of many investing styles. Through this evolution, we’ve come to understand many things about what works – and what doesn’t work – in this multi-trillion pound global market. On the following pages, we set out some of the key things we’ve learned. While these fables are designed to help the novice gain perspective, they may also help more experienced investors to question some of the accepted ‘wisdom’ of the crowd. Brad Crombie Global Head of Fixed Income, Aberdeen Asset Management Introduction The fables of fixed income.
A tale of diversity. Bonds are anything but uniform. They are issued by a wide range of entities – from governments to multinational organisations to young fast-growing companies – and in many different geographies, from the US to Europe to Southeast Asia to sub-Saharan Africa. The risk and return profile of bonds can therefore vary enormously and returns across this diverse universe aren’t necessarily driven by common factors. Bonds issued by the governments of developed markets can offer low-risk sources of return, while bonds such as those from high yield and emerging market issuers offer potentially higher returns, but carry greater risk. In much the same way, the Seven Dwarfs represented a broad range of personality types. They each constituted a separate part of the ‘whole’, performing an individual but crucial function. Doc was the natural leader, Grumpy was the sceptic, Happy bolstered team spirit, and so on. Learning from the dwarfs’ approach, we should build a diverse portfolio of bonds where the whole is stronger than the sum of its individual parts. The Seven Dwarfs The moral Remember that strength can be found in variety.
A lesson in independence.

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