Capital IdeasTM
Investment insights from Capital Group
Fixed Income
Peter Becker
Flavio Carpenzano
Investment-grade corporate bonds play a central role in a well-diversified fixed income portfolio, with the potential to generate attractive risk-adjusted returns. Many investors continue to maintain a preference for their domestic market when considering investment options.
However, investment strategies focused solely on one’s own domestic market may not be able to spread risk effectively. The potential diversification benefits of adding more markets and issuers to a portfolio are intuitive to most, highlighting the advantages of a global portfolio over regional strategies. This is illustrated in the efficient frontier analysis chart below. As can be seen, diversifying UK gilts exposure using global corporates rather than UK corporates not only increases potential expected returns, but also reduces volatility. This is due to the diversified nature of the global corporate market.
Efficient frontier analysis
Comparing hypothetical fixed income portfolios
Past results are not a guarantee of future results
Selected assets include Sterling Aggregate – Corporates, UK Gilts, Global Aggregate – Corporates (GBP-hedged).
Monthly returns from January 2001 to 31 August 2023. Source: Bloomberg
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