Fixed Income June 2017  

Getting the right yield diversification for your clients

This article is part of
Guide to finding yield globally

One way to achieve diversification is to invest directly in a bond fund, which takes the decision-making process away from both the adviser and their client, leaving this aspect to the portfolio manager.

Some bond portfolios are also designed to suit clients and investors with different risk requirements.

Ben Willis, head of research at Whitechurch Securities, explains: “Managing the bond conundrum, as we term it, is as important as ever as we potentially move into a new economic phase of inflation and gradual growth.”

However, he does not expect this to be either a smooth or rapid transition, which is reflected in Whitechurch's own funds by diversifying bond exposure as much as possible.

Mr Willis says: “For our clients, we have created a complementary and diverse basket of bond funds for cautious and balanced portfolios, especially income-focused strategies. 

“To try and mitigate a number of outcomes, our bond positions are allocated to various areas of the bond markets. Exposure ranges from index-linked gilts and investment grade credit, through to strategic bond exposure, short duration high yield and European bank paper.”

He adds: “It is via this approach that we hope we are able to provide healthy, income-driven risk adjusted returns within an uncertain outlook for bond markets.”

Duration positioning

For Mr Trindade, any diversified fixed income portfolio should have some exposure to short duration as a short duration strategy can be one way to play fixed income when interest rates are likely to increase.

He believes investors should be considering a short duration strategy as part of a wider balanced investment portfolio.

“With yield curves flat and a growing expectation that rates will rise, there can be a greater downside risk associated with investing in long duration bonds,” he cautions. 

“Additionally, taking a global approach (in terms of regions and also credit ratings) allows bond investors to potentially benefit from specific opportunities in local markets, such as the US energy sector, the UK’s securitised debt market and Europe’s subordinated debt market.”

Taking a global approach to getting fixed income exposure also helps create opportunities, or at least means investors are less restricted by geography or credit type.