In today’s low-growth, low-inflation global economy, it has been challenging for retail investors to find income. With approximately 25% of global fixed-income trading with negative yields and US credit spreads nearing cycle lows, traditional bond products no longer offer the yields they once did.
As a result, many investors are unsettled with the risk/reward tradeoff of owning significant duration risk. Alternatively, private banks offer concentrated portfolios of individual bonds to achieve yield for their clients, but this strategy is often neither diversified nor liquid. In response to this challenge, the market in recent years has been receptive to a new style of investment: the fixed maturity portfolio, or FMP.
What Is an FMP?
FMPs are designed to generate income for retail investors with relatively low interest rate risk, therefore common considerations for fixed-income investments such as duration and benchmarks are less of a focus. Consequently, the initial level of income generation as well as the sustainability of the dividend payout are critical in assessing both an FMP fund as well as its investment manager.
An FMP h custom specifications that meet their clients’ income needs. Examples of ways by which a fund can be customized include: maturity date, credit quality, asset class allocations (e.g., IG vs. HY vs. EM), country/sector/issuer size limits, and issuer restrictions. In recent quarters, EM-focused FMPs have gained popularity given the potential yield pickup in EM sovereign and corporate debt relative to developed market credit. The table below summarizes the investable universe of short-dated global credit paper available for FMP managers today.