How Zenith is using bond duration to mitigate uncertainty

Zenith bonds fixed income asset allocation

5 June 2024
| By Jasmine Siljic |
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Research house Zenith Investment Partners has outlined why it is adding duration for bond allocations in its investment portfolios to manage possible economic conditions.

Damien Hennessy, head of asset allocation at Zenith, said he is expecting an interest rate cut from the Reserve Bank of Australia (RBA) towards the end of 2024 as the Australian economy and inflation cools to the 2–3 per cent band.

A no-landing scenario, or a higher for longer interest rate case, has emerged as a dominant theme, according to Hennessy.

“The soft landing has been our base case and that is how we’ve been building investment portfolios. Still, the outlook for interest rates and economic growth is uncertain and portfolio allocations have to allow for that,” he described.

From a portfolio perspective, Zenith is targeting areas such as adding to duration for bond allocations over the past 12 months.

The asset allocation head continued: “We want to be in a position where we have more bond duration to cope with possible economic scenarios. We also like credit and are slightly overweight high-grade credit, or corporate bonds.”

Across the asset mix, the firm is positioning portfolios to effectively cope with a range of different economic scenarios.

“In equity markets, we’re targeting the parts of the market that are getting reward for the risk that you are taking, and that includes global smaller caps and some parts of emerging markets. We do still like quality as a factor within equity portfolios,” Hennessy said.

This includes quality companies that are resilient to slowing economic growth through low debt, stable earnings growth and a strong balance sheet.

Moreover, the investment professional believes the time is right for active management due to a high level of dispersion in earnings expectations.

“The benefit of active managers is that they’re spending their research time and resources on the ground, meeting with companies and researching different assets to gain more in-depth information about investment opportunities. As investors, we benefit from those deep insights and connection with the market.” 

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