The client’s attitude to risk, their need for income, their tax position, other assets held, interest rates, inflation, economic outlook are all crucial factors to bear in mind.
More conservative clients will be looking for capital preservation, a consistent yield and a return just above inflation, so Neil Mayfield, principal at Mayfield Investment Management, suggests high-quality debt can generally provide stability and mitigate risk.
“However, fixed interest funds have had a good run in recent years and the current rally in stock markets represents a risk to capital for new investors in fixed income.
“A more aggressive investor will have a greater weighting to shares and possibly property and commodities while still incorporating fixed income. The fixed income element is likely to include debt offering higher yields.”
Kevin Telfer, fixed income product specialist at Kames Capital, says picking the appropriate fixed income investments is “not that different” from equity investing.
He believes advisers should be looking for asset managers who can attract and retain investment professionals who have “genuine expertise in and experience of investing in the asset class, with a clear, robust and repeatable investment process - and whose performance track record and future potential performance meet your clients’ risk/reward requirements”.
He considers the main difference from equity investing is the impact of fixed income being such a diverse asset class with such diverse product types.
“This means that the risk/reward profile across fixed income investment funds is also very diverse. Investors and advisers really need to get under the bonnet of the products they are considering.”
Mr Mayfield advises that when choosing funds, it is vital to research the underlying assets to determine the quality and type.
“Are they US sovereign debt or emerging market, AAA corporate debt or junk bonds? Do they offer a fixed coupon, are they index-linked, are they convertible or do they offer a mixture? What is the best fit for the client’s risk profile and need for income or capital growth/preservation?”
Other factors to bear in mind, he recommends, are:
• What currencies are the underlying bonds denominated in? Are they likely to soften or strengthen?
• What is going to happen to interest rates, inflation and the economy generally and how can you use the different fixed income instruments available to account for these factors?
• Do you need to protect against inflation with a tracker of index-linkers or is there a managed fund which holds appropriate bonds and a manager with a proactive, conviction approach?
• What are the costs of the fund?
• Does the manager have a good, consistent track record? Is he or she well resourced and supported?
• Is the fund available across multiple platforms should you need to move the client to a different platform?
• Is your client’s existing portfolio and tax position such that it would make more sense to hold gilts directly?
• Can the funds be held in ISAs, pensions and other tax wrappers?