In our previous work, we shared the advantages and risks of fixed income. With its stable returns and predictability, fixed income plays a crucial role in portfolio construction. Investors often combine different types of fixed-income securities to form a fixed-income portfolio and achieve asset diversification and risk dispersion. However, for those who wish to simplify their investment process and enjoy professional management services, fixed-income funds are an ideal choice. Fixed-income funds, managed by professional investment institutions, pool investors' funds to invest in various fixed-income securities in search of stable returns. These funds not only offer diversification and risk mitigation but also provide high liquidity, enabling investors to participate in the fixed-income market with ease.

Selecting a suitable fixed-income fund is not an easy task, as it involves multiple considerations. In this article, we will analyze fund strategies and relevant quantitative indicators. Following that, we will provide an example of selecting a fixed-income fund to illustrate the selection process.

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Strategic Considerations and Quantitative Metrics

Underlying strategies and quantitative metrics are the most important considerations when selecting a fund. In terms of strategy, different fund investment approaches carry varying risk and return profiles. Determining one's risk tolerance level helps investors choose a fund type and investment strategy that suits them. For instance, investors with a higher risk appetite may opt for fixed-income funds focused on high-yield bonds. Meanwhile, investors should also consider their time horizon. A short-term fund may be more suitable if they have short-term liquidity needs, such as buying a property. Conversely, for long-term objectives like retirement planning or education funding, more conservative, medium-to-long-term investment funds may be the preferred choice.  

In addition to evaluating fund strategies, investors should also comprehensively reference the following quantitative indicators:

• Return: The total income an investor gets every year, quoted as a percentage of the original value of the investment. A higher return indicates stronger earning potential. Investors can assess a fund's performance by examining its recent and long-term returns, including annual and three-year returns, and comparing them to its peers to understand its relative ranking.

• Volatility: Reflects the magnitude of price fluctuations over a given period, typically measured by standard deviation. Higher volatility indicates greater risk.

• Sharpe Ratio: The expected difference between the investment return and the risk-free return, divided by the investment's standard deviation (i.e., its volatility). A higher Sharpe Ratio suggests the fund has generated higher returns per unit of risk assumed.

• Dividend Yield: The ratio of cash paid on a mutual fund share. If investors expect fund managers to distribute a portion of the returns in cash, dividend yield becomes a crucial metric.

• Expense Structure: We must consider the fund's management, custodian, and distribution fees to ensure the overall expense level is within a reasonable range.

• Fund Size: Generally, larger funds have stronger bargaining power and lower operating costs, which can contribute to enhanced fund performance.

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Fixed Income Fund Selection Example

Suppose we need to select from two fixed-income funds: PIMCO GIS Income Fund (hereinafter referred to as PIMCO GIS) and Invesco US Senior Loans (hereinafter referred to as INV USSL). PIMCO GIS, guided by the principles of capital preservation and prudence, invests in a diversified portfolio comprising investment-grade bonds denominated in major currencies. INV USSL aims to provide high current income levels, investing at least 80% of its net assets in US senior loans with floating rates. From a strategic perspective, PIMCO GIS adopts a more conservative approach, while INV USSL is willing to take on more risk in pursuit of higher returns.

From a quantitative perspective, we can employ the Weighted Factor Rating Method, assigning weights to relevant quantitative indicators and calculating the final score. Investors should set weights according to their individual risk tolerance. For instance, conservative investors may allocate more weight to credit ratings and volatility.

In this selection process, the fixed-income funds will be evaluated based on the following ten metrics: six-month return, one-year return, three-year return, one-year volatility, one-year Sharpe Ratio, dividend yield, duration, yield to maturity, fund size, and average credit rating.

The following example illustrates how we assign scores to each indicator based on its characteristics and specific rules. For instance, the score for six-month return is calculated by dividing the fund's return by the sum of all fund returns, in which case, higher return is more beneficial to investors. In contrast, the volatility score is calculated by dividing the fund's volatility by the sum of all fund volatilities and then taking the reciprocal, with lower volatility funds receiving higher scores. Credit ratings are scored on a tiered scale, with the lowest rating of D assigned 0.2 points, each incremental upgrade adding 0.2 points to the score, and so on.

If investors are conservative, we would allocate more weight to credit ratings (30%) and volatility (20%). Under this scenario, PIMCO GIS would have a slight edge.

If investors prioritize returns, we will allocate more weight to returns (30%), Sharpe Ratio (20%), and yield to maturity (20%). In this case, INV USSL would be the more suitable choice.

If investors aim to strike a balance across all metrics, we would assign equal weights to each indicator. In this instance, INV USSL would emerge as the preferred option.

Notably, fund selection is a highly customized process. Investors should identify the metrics that matter most to them and establish corresponding scoring rules and weight allocations to select the fund that best fits their needs.

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Summary

In conclusion, fund selection is a multifaceted process that involves considering various factors. Investors should evaluate their risk tolerance, time horizon, and investment objectives and combine these with a fund's strategy and quantitative metrics to select a product that aligns with their needs. Furthermore, investors should also regularly assess a fund's performance and market environment to facilitate timely adjustments to their investment strategy and make more informed decisions.

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