Breaking down fixed interest

On the face of it fixed interest should be the simplest of asset classes - but it's not.

- John Dyall

Investors should consider three main risks: Autocorrelation, credit and duration.

Autocorrelation is the measure of how correlated monthly returns are to previous monthly returns.

The fixed interest products with the highest autocorrelation are those that invest in private credit. The returns from private credit come almost exclusively from yield because the price of assets (loans) are valued infrequently if at all, which leads to lower capital volatility.

The real credit risk of private credit funds could be much higher than for their publicly traded cousins. Investors won't be aware of this unless there is a default, which is one reason why funds with high levels of autocorrelation have outperformed other credit funds.