Fixed income is about income, right? The clue’s in the name. While it used to be true that investors enjoyed a steady, high single-digit income from their bond investments, the picture is very different today.
Increasingly shaky global economic conditions indicate that the RBA and central banks around the world will stick with easy money policies, keeping interest rates very low. Meanwhile, safe haven global government bonds are already very expensive by some measures.
In today’s environment, bond investors not only need income, they will need to generate capital gains—and avoid capital losses—to produce returns.
In the search for income and value, investors need to look beyond the confines of their home market and the limitations of a standard benchmark if they are to thrive.
Greater concentration, longer duration and lower yields have crept into many bond indices, leaving them with major limitations as investment strategies.
But in an unconstrained bond fund, unshackled from the confines of a standard benchmark, managers are free to be opportunistic and flexible in search of the best risk-adjusted returns.
Active, global investing also offers investors a much larger universe of countries, sectors and issuers from which to improve diversification.
With such a huge universe of opportunities, the key is to allocate to the right sectors at the right times.
Three tips for navigating these challenging times:
- Mitigate downside risk - quality matters
In this environment, investors should focus on the credit quality of their holdings and concentrate primarily on investment grade rated securities in order to help mitigate downside risk.
In our view, lower quality bonds (ie those issued by below investment grade issuers) are too risky for this point in the economic cycle. It would be a bit like choosing a low quality parachute – not a great idea if you want to be assured of a safe landing.
- Dynamic allocation beyond traditional sectors
Having the ability to invest across a broad, global universe means picking the best ideas from across sectors and countries. This includes niche markets that provide valuable diversification to traditional fixed income holdings, such as securitised debt.
Today the securitised debt sector benefits from enhanced loan underwriting standards, declining US household leverage and new regulatory frameworks that make it an attractive source of diversified income for investment managers with security selection expertise.
- Seek out the best ideas
In an environment where $16 trillion of bonds globally are trading at negative yields, generating income without taking too much risk remains a significant challenge.
Investors who can deploy a flexible best ideas strategy to seek attractive risk-adjusted returns, with an emphasis on mitigating downside risk and on managing sensitivity to interest rates, are best poised to succeed.
With the hunt for income as urgent as ever, market volatility shouldn’t deter investors from seeking returns from their bond portfolios. With such a huge universe of options, its times like these that professionals really add value. Our 280+ investment specialists from our global fixed income platform, alongside a robust investment process, strive to dynamically manage the portfolios as market conditions change.
A fixed income strategy isn’t always fixed. Your investment portfolio doesn’t have to be either.
Find out more about our fixed income solutions.