Fixed Income Blog

Seven Ways Fixed-Income Investors Will Benefit from the Digital Revolution

19 September 2018

4 min read

Gershon M. Distenfeld, CFA | Director—Income Strategies

Jeff Skoglund, CFA| Chief Operating Officer—Investments

James Switzer| Head—Municipal Bonds

At long last, fixed-income investing is entering the digital age—and investors should pay close attention to what their asset managers are doing to keep up. From better pricing to better solution design, the digital revolution that’s transforming the fixed-income management landscape can lead to a host of benefits.

To grasp the performance gap between managers who upgrade their technology and managers who don’t, it’s important to understand just how behind the times many fixed-income teams still are. Roughly 80% of the notional value of US corporate bond trades comes from transactions executed over the phone. The biggest innovation in credit research until very recently? Microsoft Excel, which came on the scene in 1985.

The investment process is just as analog. Portfolio managers in many shops spend a lot of time going back and forth with different analyst teams to vet an interesting idea, then pinging it to traders, who in turn spend lots of time going back and forth with brokerages to see whether the idea is executable at a price that’s worth bothering with. And if it doesn’t work out, the whole tedious process begins again.

There is a better alternative. In fact, technology is already helping progressive fixed-income managers get to market and execute their ideas faster by allowing humans and machines to do what they do best. Computers crunch mountains of data at breakneck speeds and instantly tease out patterns from a swirl of numbers. Humans do the abstract thinking and high-level strategy planning that’s still very hard to code.

The end result: Machines make it easier for humans to instantly collect information from disparate trading pools so they can compare prices and availability, consider analysts’ views within a consistent framework, and even find new ideas by integrating the data that traders, analysts and portfolio managers rely on.

Here are seven ways investors stand to benefit from these changes:

1) Better, faster bond selection. The first step in integrating technology is to centralize and digitize the data, making it easily accessible to all members of the investment team—including increasingly capable artificial intelligence. By integrating the collective insights of teams of expert credit-research analysts in a central location, and by evaluating bonds within a consistent framework that puts everything on a level playing field with explicit numerical comparisons, bond managers will be vastly more effective at selecting which bonds to buy and sell.

2) Capturing more buy/sell opportunities. In the post-crisis era, liquidity is scarce, and even relatively small events can freeze bond markets. Even under normal conditions, a bond that seems to be available can disappear moments later, and the appetite for a particular security can fade just as fast. Having a centralized feed of market liquidity information and a combination of machine and human intelligence to monitor that feed gives investment professionals an edge when it’s time to grab a coveted bond or unload one that no longer serves the portfolio. That ability will be especially critical during a liquidity crunch, when the first to transact often wins.

3) Best prices. Under scarce liquidity conditions, tools that can survey the entire bond market won’t just find the bonds investors need. They’ll also help investment professionals ensure that they’re getting the best pricing without having to spend precious hours calling multiple brokers for quotes.

4) More time to find differentiated insights. If one of the biggest benefits of a more efficient investment process is that it gives talented humans more time to do the things machines cannot, the logical next question is: what exactly are those things?

Technology can help human investment managers find new data, proprietary or not, and ask it interesting questions—questions that competitors haven’t thought of yet. Machines are great at spotting patterns and teasing predictions from mind-bogglingly huge data sets, but the output is only as good as the input. It’s up to humans to consider more sources, try out more hypotheses and run more models to answer their own most vexing queries.

5) More time for human-to-human intelligence gathering. Not all data comes in binary code, of course. A more efficient investment process that gives analysts and portfolio managers more time to meet with, say, the officials who run municipalities or foreign Treasuries, or with company management teams, may also lead them to differentiated insights. All of this improves the odds of creating alpha.

6) More time for investment professionals to interact with clients. Investment teams have many priorities, but client interaction should always be one of the most important. Investors’ priorities are always shifting, and it’s up to investment managers to ensure not only that they understand these shifts, but that investors are comfortable with the strategies their managers are pursuing. That means answering questions at all hours about portfolio performance, how market events affect positioning, and a portfolio’s exposure to the megatrends that are shaping the world economy.

But this isn’t a one-way street. Clients and investment managers often work closely together to design and develop new investment solutions. Devoting more time to these creative partnerships can pay real dividends.

7) Lower overall trading costs. A less cumbersome investment process will ultimately result in savings for investors. While asset growth typically leads to higher trading costs and the need for additional personnel, technology pushes costs in the other direction.

For investors, all these benefits boil down to one inescapable conclusion: investment managers who integrate the right kinds of technology into their investment processes now stand to significantly outperform those managers that dither. Think of it this way: would you rather stand outside in the rain trying in vain to hail a cab, or push a few buttons on your smartphone to hail a ride-sharing service?

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

About the Authors

Gershon M. Distenfeld, CFA

Gershon Distenfeld is a Senior Vice President, Director of Income Strategies and a member of the firm’s Operating Committee. He is responsible for the portfolio management and strategic growth of AB’s income platform with almost $60B in assets under management. This includes the multiple-award-winning Global High Yield and American Income portfolios, flagship fixed-income funds on the firm’s Luxembourg-domiciled fund platform for non-US investors. Distenfeld also oversees AB’s public leveraged finance business. He joined AB in 1998 as a fixed-income business analyst and served in the following roles: high-yield trader (1999–2002), high-yield portfolio manager (2002–2006), director of High Yield (2006–2015), director of Credit (2015–2018) and co-head of Fixed Income (2018–2023). Distenfeld began his career as an operations analyst supporting Emerging Markets Debt at Lehman Brothers. He holds a BS in finance from the Sy Syms School of Business at Yeshiva University and is a CFA charterholder. Location: Nashville

Scott DiMaggio, CFA

Scott DiMaggio is a Senior Vice President, Head of Fixed Income and a member of the Operating Committee. As Head of Fixed Income, he is responsible for the management and strategic growth of AB’s fixed-income business and investment decisions across the department. DiMaggio has previously served as director of Global Fixed Income and continues to be a portfolio manager across numerous multi-sector and multi-currency strategies. Prior to joining AB’s Fixed Income portfolio-management team, he performed quantitative investment analysis, including asset-liability, asset-allocation, return attribution and risk analysis for the firm. Before joining the firm in 1999, DiMaggio was a risk management market analyst at Santander Investment Securities. He also held positions as a senior consultant at Ernst & Young and Andersen Consulting. DiMaggio holds a BS in business administration from the State University of New York, Albany, and an MS in finance from Baruch College. He is a member of the Global Association of Risk Professionals and a CFA charterholder. Location: New York

Jeff Skoglund, CFA

Jeff Skoglund is Chief Operating Officer (COO) for Investments. He is responsible for driving strategic planning, organizational effectiveness and operational excellence. Skoglund was previously COO of Fixed Income and was responsible for business strategy, innovation and technology, and talent management. Earlier in his career at AB, he was director of Credit Research and a portfolio manager for high-yield bond strategies. Prior to joining AB, Skoglund was a managing director at UBS Investment Bank, where he held numerous management positions, including global head of credit research and head of US credit desk analysts. He was an acclaimed high-yield analyst at UBS, Merrill Lynch and Credit Suisse, ranked #1 by Institutional Investor in automotive/auto parts six years in a row. Earlier in his career, Skoglund was an equity analyst and investment banker at Lehman Brothers and worked at Morgan Stanley in equity derivatives. He holds a BS in finance from Miami University, Ohio, and an MBA from the University of Michigan. Skoglund is a CFA charterholder. Location: Nashville

James Switzer

James Switzer is a Senior Vice President and Head of Municipal Bonds. He is responsible for driving our municipal bond strategy, including the firm’s innovation efforts within our municipal research, trading and portfolio construction processes, underpinned by best-in-class technology. Switzer has been instrumental in the strategic repositioning of our trading organization and the development of our industry-leading trading tools, ALFA and Abbie. Before joining AB in 2011, he was a managing director at Société Générale, where he managed the Financial Institutions Credit Trading Desk, and at BNP Paribas, where he managed the Investment Grade Trading Desk from 2000 to 2002. Switzer also formerly served as a sector portfolio manager and trader at UBS Principal Finance (from 2002 to 2005) and at Sigma Capital (from 2005 to 2008). Earlier in his career, he worked at Paine Webber and Co.; Kidder, Peabody & Co.; and Alex. Brown & Sons. Switzer holds a BA in biology from Colgate University. Location: New York

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