Principal Global Investors urges fresh approach on fixed income

4 June 2012

In a changing global investment landscape, Principal Global Investors has highlighted the need for flexibility and a fresh approach when it comes to fixed income strategy.

Darryl Trunnel, Co Portfolio manager of The Principal Global Strategic Income Fund (the Fund), said that applying new ideas was key to understanding the changing market and achieving high-yield returns with investment grade risk.

"In a post-GFC (global financial crisis) world, investors have cash to invest but are wary of risk," he said. "This is especially the case in an environment of volatile equities and the decreasing returns from cash.

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"We believe that an appropriate fixed income strategy offers very real opportunities and, given that the local market offers very limited fixed income opportunities, a global approach is the solution."

Shunning the typical allocation parameters of many local and global fixed income strategies, Trunnel said that a new world order now applied.

"Rather than sticking to investment strategies inherited from another era, we are closely attuned to global economic shifts that can have a profound effect on risk and return," he said.

"It means we need to be more open about weighting and allocation of portfolios."

According to Trunnel, the traditional view of emerging markets is a case in point. 

For Principal Global Investors, factors such as track record, improved accounting practices and growing demand in their own markets leading to significant growth, mean that certain companies in emerging countries no longer fit the old "emerging" profile.

They are therefore considered more in line with a developed-world company.

Similarly, Trunnel said that widespread deleveraging post-GFC was another prime example of fixed income opportunity that, unless closely monitored, would go begging.

"Unless we stay in tune with improving balance sheets we may miss out - again because we fail to recognise the investment implications of our rapidly shifting environment," he said.

"With deleveraging and returns to stronger performance we see companies making a transition that is, in effect, from high-yield to investment grade."

According to Principal Global Investors, this more flexible and dynamic approach also entailed a strict and ordered approach to risk.

"Treatment of risk in the new world order must and does assume priority," said Trunnel. "Just one of many controls we have in place at The Principal is a 5 per cent volatility hedge.

"We also closely manage risk by providing more realistic durations," he continued.

"Our longer-term three-year duration cycle enables us to manage flexibly and assists if any bumps arise - for example, should issues continue or worsen in the EU or occur elsewhere around the globe.

"Remaining open to change and clear-eyed about the true features of investments is essential in today's investment environment."

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