Past returns are a poor guide to future outcomes when it comes to fixed income.
As we confront a world where central banks are pursuing pro-inflationary policies, global debt levels are surging and interest rates are rising, traditional approaches to fixed income are unlikely to deliver the results investors have enjoyed over recent years.
In our view, the case for taking an alternative approach focusing on absolute return outcomes has never been more compelling.
Global bond markets have changed substantially over the last ten years and bond indices are now structurally distorted and hampered in their ability to deliver compelling real returns.
Their core characteristics are now so altered that major bond indices are unlikely to be able to deliver outcomes in the future similar to those in the past.
Consider the Bloomberg AusBond Composite Index, the most widely used Australian benchmark. Figure one shows in 2007 the interest rate duration of the index (or sensitivity of the benchmark to changes in interest rates) was approximately 3.5 years.
If interest rates rose or declined one per cent, all else being equal, the benchmark would rise or fall by 3.5 per cent in value.
Figure 1: Interest rate duration of the Bloomberg AusBond Composite Index, 2007