Investors in the dark on fixed income
With yields at historical lows, many investors are missing out on the flexibility of actively-managed fixed income portfolios due to a lack of understanding.
That’s according to Altius Asset Management chief investment officer Bill Bovingdon, who said holding fixed interest assets provided a duration exposure, which is the best way to cushion portfolio losses when there is a downturn in equity markets.
“Whether investors believe the economy will recover or will deteriorate further, having some fixed income exposure to provide duration is important to maintain a balanced portfolio,” Altius chief investment officer Bill Bovingdon said.
In a rising rate environment, for instance, short-dated bonds offer lower duration and are therefore less sensitive to interest rate changes. Similarly, investing in floating rate notes can help to avoid the downside of rising interest rates by giving up some of the potential upside if rates fall.
Bovingdon said traditionally managed fixed income portfolios and index funds do not provide this flexibility for investors.
“There is a tendency for investors to lump all fixed income funds into the one bucket, yet active managers that have developed processes and strategies - such as the ability to switch into credit strategies and floating rate notes - can add real value,” he said.
Australia remains a two-speed economy and the “transition is unlikely to be smooth or perfectly timed”, while China and the US have seen improved economic performance year-on-year since 2010, according to Bovingdon.
“In rising rate environments, fixed income does not need to be the enemy,” he added.
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