Fundamental Analysis in Fixed Income

With the Federal Reserve’s decision to raise interest rates last week, it’s important to look at how an active versus a passive fixed income investing strategy works in order to make smarter investments regardless of whether the Fed is hawkish or dovish in the next business quarters to come.

Senior Portfolio Manager of First Trust Bill Housey joined Nasdaq’s TradeTalks to discuss the challenges with typical fixed income products as they pertain to active credit investments with high yields.

Related: Correlations – Where High Yield Meets the S&P 500

“When you look at credit investments in particular, there’s no doubt that active management is very important,” said Housey. “Part of the challenge with the beta products is they’re replicating indices that aren’t really intended to be replicated for investment purposes.”

Instead, Housey recommends a fundamental analysis approach to the companies that are issuing the debt and “scrubbing financial statements to better understand the risks in the business.”   This way, an investor can better understand and underwrite the likelihood that the company is able to repay the debt in the future.