One of the investment challenges that we’ve been focusing on recently has been the relative allocation between equities and bonds across a portfolio.
As you know, equities are designed to provide long-term capital growth, while bonds or fixed income are used to provide a defensive buffer in periods of high market volatility.
However, bond yields and cash rates are falling to all-time lows. In some instances around the world, they are now negative. When adjusted for inflation, the return that investors are getting on fixed income assets is actually negative in many instances. Furthermore, we believe that the return profile for fixed income is likely to be a lot lower moving forward than what we’ve seen over the last couple of years.
So this begs the question: should investors still be thinking about investing in fixed income across a broad-based investment portfolio?
From our perspective, the answer is yes – absolutely.
We continue to see the defensive characteristics of fixed income investments as an important component part of an overall portfolio framework. And while we’re underweight both the bond and cash allocation across our portfolios, investors can still pick up an income-generative investment across other parts of their portfolio that sits alongside the investments that they continue to have in fixed income. This could be in defensive alternatives, property and infrastructure, or even equities where it’s possible to generate a stable income over time. All things considered, the income-generative nature of an investment portfolio can still be quite high, even if it is underweight the defensive or fixed income component.
We still believe that fixed income has a crucial role to play in periods of high market volatility. Yes, we do expect that the return profile from fixed income is going to be long – and that’s one of the key reasons why we’re underweight the asset class. Furthermore, we believe that if bond yields start to move higher, this will have a negative capital impact on return. However, this does not mean that investors can’t balance out the need for income across other component parts of their portfolios. This becomes a crucial part of a broad-based diversified strategy: capturing income through alternatives, property and infrastructure exposure or equity exposure.
In summary, while there are clearly some challenges ahead, we believe that the fixed income sector can be an important part of an overall portfolio configuration, and it continues to provide a defensive buffer in periods of high market volatility.
As always, if you have any concerns or queries about your portfolio, please feel free to reach out to your advisor.
Piers Bolger is Chief Investment Officer at Viridian Advisory
This post and some supporting materials may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we may have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.
The material in this post is correct and complete as of the data it was posted. Viridian is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained within this site.