BondsOct 7 2016

The pros and cons of bonds

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cisi-logo
CPD
Approx.30min
  • What is driving fixed income investment
  • How the gilts market is affected by government policy
  • How bond funds are achieving their returns

The pros and cons of bonds

  • What is driving fixed income investment
  • How the gilts market is affected by government policy
  • How bond funds are achieving their returns
pfs-logo
cisi-logo
CPD
Approx.30min
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Introduction

By Melanie Tringham
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Fixed income has often been seen as a useful diversifier away from the volatility of equities. Government bonds in particular are seen as a safe investment, and for this reason are used in great number by pension funds.

But even fixed income has been affected by volatility on the stock markets. With the flight to safety earlier this year, following the EU referendum, and the City's fears about Brexit, yields fell through the floor with some government debt producing negative yields.

Investors looking for alternative returns on fixed income are starting to turn to high yield bonds, which have become much more respectable in recent years.

These are no longer the preserve of the dodgy bond broker, selling risky assets to any seeker. Many of these assets are debt issued by large reliable companies, who might be in need of a turnaround.

Strategic bond funds have become more popular in recent years as an alternative to conventional bond funds; they have much more flexibility to buy into different types of bonds to ensure their investors get a return. They are generally referred to as being 'unconstrained', which means they have no reference to a benchmark.

They do, however, have a lot of freedom to invest in all kind of bonds, and even some equities, to achieve their returns.

Volatility is the key indicator to keep in mind when looking for the right fund. 

Many are viewing the fixed income market as being one of 'lower for longer', and the much anticipated end of the bull market in bonds has not yet happened. But fixed income should not be totally relied upon, in the same way that equities should not the sole part of one's portfolio. The diversity mantra is still as important as ever.

Given the current low yield environment, they may not be seen as the most straightforward answer to the challenge over long-term income, but with careful research, and examination of the fundamentals, they can form part of a successful investing strategy.

Melanie Tringham is features editor of Financial Adviser

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