AllianceBernstein issues fixed income warning
Australian fixed income investors are facing mark-to-market losses because of continuing uncertainty in global bond markets, according to asset manager Alliance Bernstein.
As well, the company has warned that these investors may be missing an opportunity to improve their risk-adjusted returns, according to a senior global bond portfolio manager.
"They face potential mark-to-market losses for two reasons: domestic focus and adherence to a market capitalisation-weighted benchmark," said Alliance Bernstein senior portfolio manager Alison Martier.
"We believe that, in this environment, fixed-income investors would be better served by a bond strategy that pragmatically canvasses opportunities across global markets, unconstrained by what have effectively become benchmark-imposed limitations and risks," she said.
While acknowledging that Australian government bonds had performed well during the global market volatility of the last few years, Martier cautioned that global rather than local concerns had largely driven Australia's bond market rally and it was possible that they could work in the opposite direction - causing bond valuations to fall - as global volatility continued (bond yields move inversely to bond prices).
"Just recently, we've seen Australian bond yields following US Treasury yields higher on expectations that the US Federal Reserve will begin tapering its economic stimulus program from September," she said.
This is just a couple of weeks after the Reserve Bank of Australia cut the cash rate to a record low of 2.5 per cent in response to the sluggish economy - a move that, during normal circumstances, would be favourable for domestic bonds. This shows how global, rather than domestic, factors are weighing on local bonds, Martier said.
"Under these circumstances, we feel that fixed-income investors would benefit from the broadest possible strategy, one that is global in outlook and unfettered by market benchmarks."
Originally published on SMSF Essentials.
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