After a period of falling yields, stellar returns, low volatility levels and limited drawdowns, it is going to be practically impossible for fixed-income investors to get the same level of returns from the asset class as they may have achieved historically, according to Aviva investors.
According to the London-based James McAlevey, senior portfolio manager, fixed income at Aviva Investors, following the central banks’ opening of the ‘Pandora’s box’ that was negative interest rates, it is going to be next to impossible to replicate the same return profile from fixed income going forward.
Another issue McAlevey said he spends a lot of time educating investors about is the increasing levels of volatility they can expect from the asset class into the future.
“That comes from two fundamental reasons. First of all, I think investors are still not aware of the impact the heavy-handed central bank intervention in our markets has had of depressing the levels of volatility that they’ve been experiencing,” he said.
“The other point that I think has also escaped many investors attention is that the duration of many traditional bond indices is rising, and it is rising rapidly.
“The reason it’s rising is that global corporates and indeed governments are issuing the longest-dated debt they can … investors now, if they are not operating in a genuinely unconstrained environment, and they are attached to investing in benchmark-focused products, are taking on the largest amount of interest-rate risk they ever have at possibly the worst point in the cycle for doing so.”
McAlevey therefore suggests investors need to rethink the way they fundamentally think about and engage with fixed-income markets going forward. And using a genuinely unconstrained approach such as Aviva’s Multi-Strategy Fixed Income strategy is one way to benefit from this changing mindset.
The strategy would look to deliver to investors a return of 3 per cent a year above the Reserve Bank of Australia cash rate over a three-year rolling cycle.
“By taking the ‘blinkers’ off and working in a genuinely unconstrained environment we get access to an awful lot more opportunity sets, and we have an awful lot more ability to try and deliver that cash plus 3 per cent for investors through time,” McAlevey said.
McAlevey also said strategies such as this place a heavy emphasis on capital preservation, which fixed income may have delivered in a natural, passive capacity over the past 20 to 30 years, but which was not going to be guaranteed by the asset class going forward.
