Systematic Credit: The Next Frontier in Credit Investing
Achieving uncorrelated returns in an uncertain market.
Key Takeaways
A revolution in fixed-income trading has given rise to systematic credit, an innovative fixed-income investment strategy.
This next-generation approach to credit investing offers investors the potential for attractive, uncorrelated returns at a lower cost.
Its transparent, repeatable approach may make systematic credit an appropriate core allocation or attractive complement to fundamental credit managers.
Thanks to a fixed-income trading revolution, bond investors can access an innovative, low-cost strategy that expands return potential while managing risk. Long a tool of equity investors, systematic investing now represents a compelling alternative for fixed-income investors.
The Role of Electronic Trading in Systematic Credit
The shift from voice-based bond trading to electronic platforms has unleashed these new opportunities. Specifically, the surge in electronic trading has bolstered the case for systematic credit investing. As increased trading volume boosts liquidity in underfollowed market segments, systematic credit managers can uncover potential value where many fundamental managers aren’t looking.
Additionally, growing investor demand for fixed-income ETFs has further enhanced credit market liquidity while aiding the implementation of systematic credit strategies.
Broadly speaking, systematic credit strategies seek to uncover active sources of return that many fundamental approaches typically overlook. Via a well-defined and repeatable quantitative process, systematic credit identifies factors associated with active return sources. The strategy then incorporates those factors into security selection and portfolio construction models.
Systematic credit seeks to deliver excess return potential generated exclusively from security selection. The technology driving the strategy highlights opportunities in overlooked segments of the credit market while maintaining risk parameters.
Overall, the approach strives to deliver higher capture ratios than passive strategies, with similar diversification advantages. It also offers low correlation with fundamental credit strategies. Accordingly, systematic credit can complement a fundamental fixed-income approach or serve as a core strategy.
Our new paper, “Systematic Credit: The Next Frontier in Credit Investing” provides an overview of the systematic credit process and potential advantages. The paper also highlights the key features and differentiators of American Century Investment’s systematic credit method. We invite you to take a closer look.
Author
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Investments in fixed income securities are subject to the risks associated with debt securities including credit, price and interest rate risk.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.