Our experts explain why it may be time for you to reassess your fixed income holdings, as central bank policy around the world begins to normalize.
Fixed income investments play a critical role in the management of portfolio risk. They can provide a more reliable stream of income than other investments. Including fixed income investments in a portfolio may also help provide a degree of diversification, in the sense that the value of fixed income investments can behave differently to other asset classes under various scenarios – perhaps helping reduce the impact of future market reversals.
However, the future performance of fixed investment investments cannot be taken for granted and this is why it may be helpful to “fix your fixed income”. This is a complex and multi-faceted asset class. History reminds us that fixed income performance may not be adequately delinked from equities’ performance at times of market stress. And now we face an unprecedented situation where the many global central banks, having artificially boosted bond prices over the last decade through “quantitative easing” are now seeking to reverse this strategy.
Our CIO team continues to recommend that clients should “Stay Invested But Hedge". They do not expect a recession in 2019, but they do recommend that investors should take steps to safeguard returns in future. In this environment, how does your fixed income portfolio need fixing? In this, the third in our four-part series exploring how to ‘Stay Invested But Hedge’, experts from around Deutsche Bank Wealth Management offer their ideas and explain how they can help.
Consider switching to actively managed fixed income funds
Romy Cuadras, Global Head of Fund Solutions
With the markets becoming more volatile and the performance of different bonds becoming more varied, or ‘dispersed’, it is important to do two things:
Be more selective in your fixed-income investments; and
Be ready to act to seize opportunities and mitigate threats in the bond markets.
If the fixed-income allocation of your portfolio is mainly comprised of passive bond funds, for example, you may wish to consider switching some of these investments to actively managed bond funds – provided of course that this is appropriate for your individual portfolio and objectives, and that you select fund managers who have the right characteristics to take advantage of the current market conditions.
Our Fund Solutions team can help you to identify funds that will give you the opportunity to achieve your goals in return for an acceptable level of risk. Thanks to our open architecture, we can offer you access to a wide variety of fund providers and recommend individual fund managers whose performance and strategies we have analysed in detail. And of course we will work with our partners in Wealth Management to ensure your portfolio remains appropriately diversified, based on your overall wealth needs.
Delegate your fixed-income investing to the experts
Christian Nolting, Chief Investment Officer and Global Head of Wealth Discretionary
Central banks in many developed economies are reducing their asset purchases and this will put downward pressure on government bond prices – there will be less demand and, in some economies, extra supply through borrowing needs. But bond prices are affected by many factors and the results can be counterintuitive. Demand for German government bonds can for example sometimes be increased by trouble elsewhere in Europe as they are seen as a ‘safe haven’ investment. Corporate bonds can be affected by a range of other, often idiosyncratic factors.
Against this background, there will be continue to opportunities across the fixed income spectrum, but it is vital to be selective. There are many different sorts of fixed income investments and these need to be evaluated in terms of your portfolio and your portfolio objectives. You should not assume that all government bonds are ‘safe haven’ investments under all circumstances and be aware that corporate bond prices can move in unexpected ways too. Bond holdings therefore need to be carefully diversified and actively managed. Getting this right is likely to need specialist knowledge.
For further guidance on how to ‘Stay Invested, But Hedge’, try watching the other videos in this series:
Alternatively, you can download a full copy of our ‘Stay Invested, But Hedge’ CIO Insights report here.