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Fixed Income Allocation: Where? | CFA Institute Enterprise Investor


Covid-1 – Induced recession and bond yields How will investors change their fixed income portfolios to take advantage of the impending economic recovery as the US economy finally recovers?

Most assume that as the United States emerges from the recession, there is no better place to allocate their debt. But, in fact, our analysis reveals that international and emerging markets may benefit the most from increasing consumer demand in the US.

In fact, during the economic recovery in the United States, emerging market debt করেছে both corporate and sovereign-US-based debt করেছে has risen by more than 8 percentage points per year, much more than in recession or “normal times”.

The monthly returns of all USD mutual funds across multiple asset classes dating back to 1990 are the culmination of our experiment.

Following the NBER classification of the business cycle, we have isolated four recessions over the last 30 years: July 1990 to March 1991, March 2001 to November 2001, December 2007 to June 2009, and February 2020 current. We then analyzed how the average fixed income mutual funds of each grouping performed during this recession, the next two years of this recession and the “normal time”.


Which is the best?

Emerging markets Emerging markets are sovereign International International Sovereign
US recovery 18.78% 15.45% 11.54% 14.47%
Normal times 10.08% 5.96% 3.65% 3.68%
The US recession 9.45% 3.15% 3.91% 3.59%

The US is long-term US Intermediate US short-term US Mooney US corporate
US recovery 10.74% 10.46% 6.19% 10.50% 11%
Normal times 7.23% 4.48% 3.09% 4.61% 6.17%
The US recession 6.88% 7.01% 6.13% 7.97% 7.78%

We have seen emerging market debt do better in the first two years after the US recession than at any other time. The average emerging market debt fund increased by 9.33 percentage points, 18.78% vs. 9.45%, on an annual basis during the US economic recovery compared to the US recession.

Not only did emerging market debt funds do the best job as the U.S. economy revived, they also surpassed all U.S.-centric fixed-income funds during this period. These include high-risk and high-interest-sensitive funds. For example, risky U.S. long-term bond funds during the U.S. economic expansion downgraded their emerging market peers by 8.04 percentage points annually, from 18.78% to 10.74%.

This dynamics exists for specialized mutual funds in sovereign emerging markets. During a recession, these mutual funds offer an average annual return of 3.15%. Of all the types of debt we investigated – US, international and emerging markets – this was the lowest average income during the recession.

During the period when the United States is recovering, however, the same mutual funds have returned an average of 15.45% per year – higher than other asset classes during this expansion.

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As the U.S. economy finally declines after 2020, it may seem normal to place bets on U.S. resources in general and U.S.-centric debt in particular. After all, why shouldn’t they benefit as the domestic economy improves?

But smart money managers may have a different perspective and they can focus their persistent income perspective on a more forward, emerging and international market.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Photo Credit: © Getty Images / Jamie Grill


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Derek Horstmeyer

Derek Horstmeyer is a professor at George Mason University School of Business, an expert on exchange-traded funds (ETFs) and mutual fund performance. He currently serves as the new director of financial planning and asset management at George Mason and established the first student-led investment fund at GMU.

Mohnad Aldail

Mohnad Aldail is a recent graduate of George Mason University School of Business and a major in economics and a minor. He is currently pursuing a CFA degree and is a candidate for the CFA Level I exam. He has interests in asset management, public equity and private equity. He hopes to secure a position as an investment analyst.

Ethan Ionanu

Ethan George Yanno is the current senior at George Mason University, ready to graduate in December 2021. After graduation, he plans to join a firm’s M&A and evaluation consulting team. His interests include private equity, factor investment and asset pricing models.



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