Australians have the lowest rate of bond ownership in the world, according to global advisory group, Willis Towers Watson. But some experts say they are very attractive long-term investments that mitigate risk in a portfolio.
Fixed income fund manager, PIMCO, said advisers and their clients should look at fixed income investments, such as bonds as they offered diversification in a portfolio, income, and less volatility than the current market.
PIMCO managing director and head of portfolio management Australia, Robert Mead, said that was why bonds were increasingly important for every investor.
However, they were particularly important to those investors who were getting older, had shorter investment horizons, could not afford to take on much risk, but still needed that income, he said.
An analysis of 459 fixed income funds on the Money Management Investment Centre (MMIC) and Financial Express (FE) website found only four fixed income funds produced a long-term return (over 10 years) of over eight per cent per annum.
Bentham’s wholesale high yield fund generated the highest return with 9.4 per cent, followed by three of PIMCO’s funds, which all produced over eight per cent per annum, as shown in the table below.
TABLE 1: FIXED INCOME FUNDS PRODUCING OVER EIGHT PER CENT
Mead said PIMCO generated very strong portfolio returns in the fixed income sector as it had diversified sources of alpha and identified early on that interest rates were going down.
“Positioning portfolios to take advantage of changes in interest rates has been a very large and important generator of returns,” he said.
In addition, their overweight position in the financial sector post the GFC, was another large contributor to their outperformance.
“[We’re] thinking about how to invest across different global interest rate markets, how to invest in the credit areas, how to think about currencies that are going up or down, and then actively positioning a portfolio to benefit from those proprietary views,” Mead said.
“We’ve been able to not only generate strong returns but also do it with a fraction of the volatility of other bond managers and a fraction of the volatility of the equity market,” he said.
As to what the future held, PIMCO believed that rates would be cut again, the European sector dislocated, and that equity investors would be under pressure as earnings would be squeezed.
“But, for the bond holder further up the capital structure, we think there is tremendous value,” Mead said.
