Capital Ideas^TM

Heightened market volatility and uncertainty has once again refocused investors’ minds onto answering the question of the optimal route to constructing a well-diversified portfolio. The benefits of diversification are always sought, and while the correlation between equities and bonds turned positive in 2022, we expect that high-quality bonds should once again offer relative stability and diversification to risk assets, one of the key roles of bonds in a diversified portfolio, as central banks approach the end of their rate hiking cycles.

The global investment grade corporate bond universe is very diverse. This diversity provides fertile ground for a well-resourced asset manager to consistently add value to sector returns over a market cycle. Given the size of the investment universe, bottom-up security selection (one of Capital Group’s core strengths) is crucial to exploit any investment opportunities. Analysts conduct bottom-up research across industries, geographies and fixed income sectors to assess issuers’ financial condition and risk factors, potential debt-service roadblocks and new investment opportunities around the world. Analysts also leverage research and analysis conducted by the equity and macro research teams. This offers an information advantage given the depth of insights analysts are able to employ in building their portion of the fund.

In this research piece, we will look at the specific characteristics and drivers of market returns for global investment grade (IG) corporate bonds and how Capital Group approaches these factors to add consistent excess returns in this sector over the market cycle.