What Is Next Generation Fixed Income (NGFI)?

Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of fixed income strategies, from traditional, benchmark-oriented approaches to alternative tactics such as hedge funds and fully unconstrained strategies.

Key Takeaways

  • Next generation fixed income (NGFI) is an innovative approach to investing in which a portfolio manager actively exploits all factors of return across a range of fixed income strategies.
  • Global diversification is a priority for many NGFI investment managers.
  • NGFI investing emerged as a response to the challenges posed by interest rate volatility and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance.

Understanding Next Generation Fixed Income (NGFI)

NGFI investing emerged as a response to the challenges posed by interest rate volatility and an aging population to a traditional fixed income managers ability to successfully generate superior investment performance. As a result, innovative investment managers are now blending both traditional and alternative investment styles, and utilizing sophisticated investment tools and trading strategies, in an attempt to exploit all the factors of return that are available.

Today, more and more investment managers are moving away from traditional fixed income strategies, such as core and U.S. government products linked to broad market benchmark indexes and top-down macroeconomic views. Instead, innovative active managers are turning toward more contemporary ways to generate alpha and develop sustainable income solutions. These investments include products that hedge against rising inflation and interest rates, local-currency and U.S.-dollar-denominated emerging-market debt vehicles, benchmark-agnostic unconstrained strategies and more. Global diversification is a priority for many NGFI investment managers. That’s because a majority of fixed income investors, especially those in workplace retirement plans, continue to be heavily exposed to the home country bias of the Bloomberg Barclays US Aggregate Bond Index.

Next Generation Fixed Income (NGFI) Investment Types

The universe of NGFI investment products and vehicles is constantly expanding. Used alone or in conjunction with more traditional strategies, they represent a fast-growing component of diversified investment portfolios. The following is an overview of types of NGIF investments:

  • Multisector bond investments – Seeks income by diversifying assets among several fixed-income sectors such as U.S. government and corporate bonds, international end emerging-market sovereign debt, and U.S. high-yield debt securities.
  • Unconstrained strategies – Eliminates the constraints of tracking a benchmark. Fixed income managers are not required to adhere to specific bond ratings, currencies or sectors, and they may use derivatives to hedge against price and rate ranges. They may also bet against the market by using put and call options.
  • Floating-rate bank loans – The underlying interest rate on most loans adjusts every 30-90 days, based on changes in the reference rate, such as LIBOR. Thus, the market value of a floating-rate loan will be less sensitive to changes in interest rates relative to most fixed-rate investments.
  • Absolute return – These fixed income strategies seek to generate a positive return by investing in opportunistic return sources such as currencies, long and short positions, interest rates and more.