HELPING YOU GROW YOUR NET WEALTH
HELPING YOU GROW YOUR NET WEALTH
HELPING YOU GROW YOUR NET WEALTH
HELPING YOU GROW YOUR NET WEALTH
FIXED INCOME
OVERVIEW
As the world slowly recovers from the COVID-19 pandemic, we are coming to terms with some fundamental shifts in the global investment landscape. Traditional ideas relating to correlations between asset classes, and the roles of asset classes in portfolios, are being challenged.
Meanwhile, diversifying assets, such as private market investments, have become more accessible to a wider range of investors. This has increased opportunities, but has also added complexity to the investment landscape and enhanced the need for specialized expertise in investment research.
Central banks around the world are grappling with the dilemma of inflation, which has re-emerged in the wake of the pandemic. While some inflation is expected during a recovery period, there is much debate as to how transitory this latest spike will be. This has raised the likelihood that inflation hedges will be more of a requirement in client portfolios.
Important research and dire warnings from scientists and global organizations have focused investors’ minds on the impacts of climate change on countries and their economies. Comprehensive action is needed to help ensure portfolios are protected against climate risks.
Advisors and their clients need to be adaptable to the challenges that lie ahead in the post-pandemic world.
MODERNIZING SUSTAINED FIXED-INCOME PORTFOLIOS
Following the global financial crisis, “traditional” balanced portfolios, made up of 60% equities and 40% floating-rate assets, outpaced more diversified portfolios. However, we believe that sustained low-interest rates, inflationary pressures and high equity valuations will continue to reduce forward-looking return expectations for client portfolios.
This means building forward-looking analyses based on past stock performance could be less conducive. Given these challenges, advisors and their clients should consider adding investment exposure from outside the traditional framework, such as bonds and other diversifying alternative strategies that add diversification. It should be recognized that including these asset classes can make portfolios more complex and that it requires additional expertise in asset manager selection, portfolio management and overall due diligence.
Key Considerations
- Explore alternative investment strategies such as fixed-income and managed funds. Over a market cycle, these can provide portfolios with additional sources of safe and low-risk returns.
- Understand and discuss with clients the potential benefits that alternative strategies may bring to a portfolio. Benefits may include increased returns and fixed-rate returns over short, medium and long-term periods.
- Pursue the proper level of investment to help ensure that operational due diligence is incorporated within the manager research and selection process. This due diligence should be carried out by a highly experienced internal team.
- Establish a clear understanding of the role of fixed-income assets in client portfolios. Are they included for risk-reduction or income-generation purposes?
- Consider whether the diversification benefits of holding fixed-income assets, particularly in Australia, still hold true under an inflationary scenario in which interest rates are rising.
- Help to ensure that clients are aware of – and comfortable with – the risk involved in moving allocations to higher-yielding but lower-quality investments. Ask whether such a position is worth the potential loss risk if credit markets deteriorate.
- Examine the suitability of other sources of income and yield, for example, growth fixed income such as higher-yielding and emerging market debt, private debt or more absolute return bond funds
