Passive equities and passive fixed income are not equal and there are risks to viewing them as such. This session highlights some of the challenges passive fixed income management can present to investors and an in-depth analysis of how active managers use different methods to generate alpha. This presentation demonstrates why credit wins over time and why investors should use duration as a risk management tool versus an alpha generator.

Session Key Takeaways:

• Investing in passive fixed income should not be equated with investing in passive fixed income due to structural differences in index construction.
• Forecasting interest rate movements or making duration bets is well documented to be challenging and not a reliable returns generator.
• Having flexibility in when/if you add credit or exit credit can be beneficial.

ALT session Key Takeaways:

• Investing in passive fixed income should not be equated with investing in passive fixed income due to structural differences in index construction. Attendees will learn that these risks include issuer concentration risk, issuance-based index construction (which impacts issuer concentration and interest rate risk exposure), and a limited opportunity set as the most commonly used index (U.S. Bloomberg Aggregate) only represents ½ of the available U.S. fixed income market. Passive equity indices have different requirements, and inclusion is generally a function of fundamentals – the most commonly used index (S&P 500) represents about 80% of available market capitalization.
• Forecasting interest rate movements or making duration bets is well documented to be challenging and not a reliable returns generator as you either win your bet or lose. A study completed by the University of California, Berkeley shows that out of 16,559 forecasts of unemployment, inflation, and economic growth (the longest and most complete forecasting project, the Survey of Professional Forecasters) forecasters were only correct ~23% of the time. This presentation will also cover that the market is not the best guide for future interest rate moves. In the past 5 years, market pricing of the Federal Funds Interest Rate 1 year in the future has been incorrect from a magnitude standpoint and/or a directional standpoint.
• The presentation will cover the basics of credit risk and how investors are compensated for taking on additional credit risk. Attendees will learn that historically credit has excess returns over Treasury securities despite experiencing more price volatility, and that this volatility declines over longer holding periods. The presentation will also cover how credit spreads can be used to gauge whether current compensation for taking on credit risk is appropriate and how investors can position portfolios that best meet their risk appetite.

Speaker Bio: Jim Jackson, CFA: Chief Investment Officer, Victory Income Investors

Jim Jackson is the Chief Investment Officer of Victory Income Investors, which was formerly known as USAA Investments, a Victory Capital Investment Franchise, and was acquired by Victory Capital in July 2019. Mr. Jackson joined USAA in 2009. Previous experience includes roles with Hartford Investment Management Company (HIMCO), Barings and Cigna Investment Management. Prior to entering the investment business, Jim served in the United States Marine Corps. Mr. Jackson holds a B.S. in economics from the United States Naval Academy and received an MBA with High Distinction from the Ross School of Business at the University of Michigan in 2001. He is a CFA® charterholder.