In today's environment of slow economic growth and low inflation, investors are struggling to make ends meet—to generate returns meeting liabilities and other objectives. Slow growth leads to low expected equity returns and low inflation expectations translate into low bond yields. Pension plans plagued by perennial underfunded status are continuing to lower their expected rates of return in response. This is putting particular pressure on the fixed-income allocation to generate higher returns beyond its traditional roles of income, diversification and risk reduction.
The problem with traditional strategies closely aligned with broad market indices is that they inherit a set of characteristics that are not always aligned with client needs. They have a heavy skew toward duration. They only include a small portion of investable securities. They give up potential for diversification as well as return potential.
We believe unconstrained fixed-income strategies—strategies not tied to a benchmark—are valuable complements to traditional strategies for investors to reach their objectives. In its most basic form, unconstrained investing allows an investor to allocate capital based on an independent assessment of value and risk rather than the issuance patterns of the major constituents of the indices. Unconstrained strategies allow us to provide exposures more aligned with clients' needs, to uncover more value and to provide more diversification.
In this spotlight we outline how Western Asset thinks about unconstrained fixed income and the range of unconstrained solutions we provide to meet client objectives and needs.