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Fixed Income - January 2015

    CPD
    Approx.50min
    Fixed Income - January 2015

    Introduction

    Instead, US Federal Reserve chairwoman Janet Yellen and Mark Carney, governor of the Bank of England, defied expectations and held interest rates.

    So the fact that fixed income performed quite so well in 2014 took many investors by surprise.

    Ben Bennett, credit strategist at Legal & General Investment Management, explains: “At the beginning of the year most people anticipated higher interest rates, particularly in the US but also the UK. Most people assumed interest rates would be going up throughout the year and rising interest rates generally isn’t good for total returns, of course. So most people expected low but positive total returns for the year.”

    Instead, it was a good year for fixed income and those investors who held fixed income assets in their portfolios would have seen decent returns.

    Mr Bennett says: “Everything actually shoved interest rates lower rather than higher, which led to very good returns for fixed income assets, outperforming equity markets, particularly in the UK where the FTSE [100] ended down on the year.”

    He says sterling investment-grade corporate bonds delivered a total return of 12.5 per cent last year, but cautions that it will be difficult to repeat that performance in 2015.

    Towards the end of last year investors remained undeterred from investing in certain areas of fixed income. According to the latest figures from the Investment Association (formerly the IMA), fixed income was among the top-five selling sectors in November 2014. During the month, Sterling Strategic Bond funds recorded net retail sales of £144m, making it the fourth bestselling sector, up from its eighteenth-place ranking the previous month.

    Jon Jonsson, manager of the Neuberger Berman Global Bond Absolute Return fund, hails 2014 as a surprising year for fixed income.

    He comments: “Fixed income certainly overall performed quite strongly but I think the composition of returns was somewhat of a surprise, where riskier assets underperformed expectations and government bonds and the risk-free assets performed much better than expected.”

    It would seem the fixed income market is at the whim of central banks’ monetary policies. So the question for fixed income investors is, where will returns come from in 2015?

    Typically, in an environment where monetary policy is being tightened in the US and UK, investors might expect lower returns but, as they saw in 2014, perhaps they should be prepared to expect the unexpected.

    Mr Jonsson insists fixed income should retain its place in an investor’s portfolio as a form of diversification, although questions remain around the composition of fixed income assets.

    He adds: “You should still have fixed income representation; it’s just a question of the mix of duration risk and the credit risk.”

    Ellie Duncan is deputy features editor at Investment Adviser

    In this special report

    CPD
    Approx.50min

    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. Once it starts raising interest rates the US Federal Reserve is likely to continue the trend at subsequent meetings to reach its target level of what by 2017, according to David Kelly?

    2. The fixed income asset class saw net retail inflows of how much in November 2014, according to figures from the Investment Association?

    3. Emerging market credit spreads are now back at their highest level for five years, according to Chris Higham, but at what level?

    4. The Investment Association’s Sterling Strategic Bond sector recorded net retail sales of how much in November 2014?

    5. The US Federal Reserve is likely to start raising interest rates in 2015 for the first time since when?

    6. Of the seven Investment Association fixed income sectors which delivered the lowest return of 0.73% for the 12 months to January 14, according to FE Analytics data?

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