Table of Contents
The Core Plus Fixed Income Strategy seeks to add +150 bps of annualized excess return over a broad market fixed income index over a full market cycle by emphasizing relative-value based sector allocation, research-based subsector/security selection, and duration/yield curve/currency management.1,2
PGIM Fixed Income’s philosophy is that diversified portfolios, built through the integration of credit research, quantitative research, and risk management, can achieve consistent excess returns for clients with a high information ratio. This same research-based process is similar across all strategies managed by PGIM Fixed Income.
The Core Plus Fixed Income Strategy seeks excess return from multiple, diversified sources, including sector allocation and subsector/security selection. Duration, yield curve, and currency positioning is moderate. The largest component of the Core Plus Fixed Income risk budget is allocated to investment activities that have consistently generated the highest return for the lowest unit of risk over time, such as sector allocation and subsector/security selection.
Our Core Plus Fixed Income portfolios may emphasize spread product in the sector allocation process and therefore may hold larger-than-benchmark allocations to corporate bonds, structured product, high yield bonds, and emerging markets debt. As a result, the Strategy would likely outperform in a ‘risk on’ environment where corporate bonds, for example, are outperforming. The reverse would also likely be true.
As for security selection, our Core Plus Fixed Income portfolios take an actively-managed, relative-value driven approach. We continually analyze various security relationships in the market in order to exploit temporary market inefficiencies. Each trade is intended to capture small increments of value, with the sum of all relative value security selection expected to contribute a meaningful portion of expected excess return over time. As such, the Strategy is expected to perform best in markets with excess spread dislocations that it can capitalize on through relative value trading. In contrast, a low volatility interest rate environment with little spread or interest rate movements would most likely lead to more stable security-to-security relationships and, in turn, make it more difficult to outperform.
We believe our philosophy for managing Core Plus Fixed Income portfolios will be successful in the future because it is diversified—relying on several proven strategies rather than a single interest rate, term structure, or credit decision. Two of these strategies—subsector rotation and fundamental security selection—are strategies that we believe are equally appropriate in strong and weak markets, although naturally the subsectors and securities chosen will vary given the economic and market environment.
PGIM Fixed Income employs a disciplined, three-step investment process to manage Core Plus Portfolios:
1 There is no guarantee that these objectives will be met.
2 On average, over a full market cycle defined as three to five years.
No risk management technique can guarantee the mitigation of elimination of risk in any market environment.
Source: PGIM Fixed Income as of September 30, 2020.