Advisers should have an understanding of their clients’ tolerance of risk and their desire for returns, according to Trevor Welsh, head of UK sovereign and inflation at Aviva Investors.
With interest rates already at record lows, and likely to rise, Mr Welsh says bond investors cannot expect the level of returns they have received in the recent past. However, he says fixed income securities provide investors with a multitude of opportunities.
He says: “Established firms specialising in fixed income possess expertise across the full range of assets. Increasingly, advisers are seeking out those firms which can demonstrate an ability to generate additional performance by combining the most effective strategies within these asset classes.”
Karthica Underwood, Chartered Financial Planner at Principal Financial Planning, points out you can have actively managed or passive fixed income funds. She says some advisers will have a preference over the style of fund management, so that in itself may dictate the fund they select.
Firstly though, Ms Underwood says the adviser should identify exactly type of fixed income fund or range of funds will be suitable for the investor.
For example, Ms Underwood says where the investor is very cautious the adviser may want to focus on less volatile shorter-dated or higher-quality fixed income funds.
Ms Underwood says: “They may choose to focus on funds where the income is higher but also the level of risk high if this might better meet the income needs.
“An independent research tool will help filter out the funds where track record is not consistent. Investments such as these should be considered for at least the medium term, this is generally considered to be five years plus.”
An independent research tool will help focus the research on specific types of fixed income funds and help identify those funds that have a good and consistent track record, according to Ms Underwood.
If using model portfolios then she says it is important to understand the asset allocation and investment selection process and be comfortable that you are recommending the best strategy and fund for the investor.
With the outlook for base rates to rise, Adrian Lowcock, senior investment manager of Bristol-based Hargreaves Lansdown, says investors could be at risk of losing money on their investments, so it is necessary to pick experienced managers who have the greatest flexibility in how they invest their portfolios.
Mr Lowcock says: “Fixed income yields are still quite low and investors are not always being well rewarded for the risks they take.
“Strategic bond funds are probably the best place to be as the managers can go wherever they like within the fixed income market giving these managers the greatest flexibility.”
