Finding meaningful returns in a fixed income market where yields on government bonds are low requires a proactive approach, experts say.
“We think active management is the way forward in the fixed income market,” said Håkan Enoksson, head of fixed income at RBC Wealth Management. “Strategies that can capitalise on the evolving market environment, rather than simply holding an asset to maturity, will be better positioned for gains. A passive approach does not allow investors to be as selective about where and how they take risks to achieve returns.”
Mr Enoksson added that , while government bonds yields have lost appeal, the corporate market is more attractive despite risk premiums – the amount a bond must return in excess of the risk-free rate – being high at the present time.
“Risk premiums are distorted in the corporate space, but there’s still a lot of room to push up in this market,” he said, adding that these risk premiums should decrease and returns will be boosted relative to government debt when the economy picks up.
Meanwhile, JP Morgan Asset Management analysis of the fixed income market has shown investors are being forced to take bigger risks in order to find income.
“Investors should be looking for flexibility with the prospect of rising yields,” said Olivia Mayell, client portfolio manager, JP Morgan Multi-Asset Income fund.. “They have to broaden their horizons when it comes to sourcing income across a more diversified global landscape of asset classes.”
JP Morgan said it might be necessary to look at non-traditional investments that add yield and diversification to a portfolio, which might include global high-yield bonds, developed and emerging market equities, emerging market debt, mortgage, convertible bonds, real estate investment trusts and others.
So-called “bond-like equities”, which are high-quality companies with lower risk levels paying sustainable dividends present another option. “Finding quality stocks with good earnings growth forecasts and low volatility should help to balance and diversify the risk of equities investing,” said Dan Morris, global market strategist at JP Morgan.
Meanwhile, Mr Enoksson at RBC Wealth Management said there is no sign of a major sell-off, or ‘great rotation’ in the fixed income market as has been previously suggested.
“We don’t see any risk of a disorderly sell-off in the fixed income market,” Mr Enoksson said. “If we were to see a sell-off, we’d need to see a central bank doing something or the economy doing better.”
He added that central banks want any move out of fixed income to be controlled so that it avoids value destruction and negative returns for investors.
