‘Higher for longer’ prompts flight to fixed income by advisers
The interest rate environment of ‘higher for longer’ is prompting financial advisers to increase their weightings to fixed income and cash.
According to Investment Trends, the percentage of respondents who say they plan to increase their weighting to cash or fixed income has risen from 9 per cent in 2021 to 24 per cent in 2023.
The 16th Adviser Product and Marketing Needs Report surveyed over 1,200 advisers between June and July 2023.
Some 15 per cent of new client inflows are going into the asset class, and it is expected this will keep growing as rates remain high.
One in four advisers said the impact of yield considerations and recessionary fears play into their asset allocation decisions.
Rates in Australia have risen by more than 4 percentage points since May 2022 and currently sit at 4.35 per cent. The Reserve Bank of Australia has also indicated it is not done with the hiking cycle and may yet hike once more before rates reach their peak.
“With the backdrop of the most accelerated rate hike cycle in recent history (domestically and in most OECD countries), the pendulum has certainly fully swung the other way, reigniting demand for cash and fixed income as asset classes of choice”, said Irene Guiamatsia, head of research at Investment Trends.
Earlier this week, the Global Fund Manager Survey from the Bank of America (BoA) found managers’ allocation to fixed income is at the largest overweight it has been since the global financial crisis in 2008.
Over half of BoA respondents expect bonds to perform best in 2024 compared to just 29 per cent who expect equities will perform best. Specifically, they favour high grade bonds with a net 37 per cent saying high grade bonds will outperform high yield ones.
The only other area that has kept growing since 2021 is the number of advisers who said they will be more involved in the selection of individual investments.
When it comes to selecting specific products, advisers said the three most important factors to consider are performance, low costs and active management expertise, whereas a lack of trust will deter an adviser from a particular manager.
“The primary factor for preferring a fund manager continues to be the manager’s investment philosophy, and it’s vitally important to communicate this clearly. But advisers have stepped up the amount of scrutiny they place on both performance and fees.”