Your IndustryNov 9 2015

Investing in Fixed Income - November 2015

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Approx.60min

    Investing in Fixed Income - November 2015

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      Introduction

      By Ellie Duncan
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      But the credit markets have proved too uncertain for many, with fixed income funds seeing net retail sales outflows of £515m in September, according to the Investment Association. It’s the highest outflows for the asset class since June 2013.

      The volatility that has rocked fixed interest seems likely to be a feature of the asset class for some time.

      Jim Leaviss, head of retail fixed interest at M&G Investments, explains: “It is the result of increased macroeconomic uncertainty, especially in emerging markets, at a time when the Federal Reserve and the Bank of England are threatening to raise interest rates. As long as these factors remain in place, we should continue to see volatility in the market place.”

      Chris Higham, fixed income fund manager at Aviva Investors, agrees: “There will be continued volatility… and as a consequence it makes it difficult to take large asset allocation positions within fixed income.”

      This is despite 2015, which has seen “the largest year of quantitative easing since the crisis, which I always find staggering”. While there has been constant speculation about when the Federal Reserve will hike rates, Mr Higham notes there have been more than 50 interest rate cuts globally so far this year.

      It is natural for investors to flee asset classes that are subject to significant volatility, but while interest rates remain low, yield will continue to be a priority for investors.

      And for those who remain undeterred, there are opportunities to be found.

      “Active investors should always view volatility as a potential source of increased returns, and therefore continue to search the bond markets for interesting opportunities,” Mr Leaviss advises. “In the corporate bond markets, spreads have widened throughout the year and are now at levels that significantly overcompensate investors for the risks of company defaults.

      “In addition, floating-rate bonds, including asset-backed securities, should do well in the current environment, as they provide protection against rising yields.”

      He adds: “Finally, inflation protection is currently quite cheap and this represents a major buying opportunity. Markets are currently pricing in five years of deflation in Europe, when in reality periods of negative inflation have historically been extremely rare.”

      Paola Binns, senior credit fund manager at Royal London Asset Management, suggests that those in search of yield should adopt a medium-term outlook.

      “Corporate bonds… are attractive at their current pricing, compared to gilts or cash,” she says.

      “What region should those investors look to? Sterling investment-grade corporate bonds are issued by a wide range of global borrowers and the sterling market is looking relatively cheap right now.”

      There is an even stronger argument for having some allocation to fixed income in a diversified portfolio, Mr Leaviss observes: “Correlations between equities and government bonds have turned increasingly negative in the past few weeks, which means there are now even more diversification benefits to allocating to fixed income.”

      Ellie Duncan is deputy features editor at Investment Adviser

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