Financial advisers and investors are favouring diversified and hybrid-style approaches to fixed-income funds, as the traditional ‘old world’ strategies offer limited return possibilities.
A ‘new world’ order of highly active management could now be appropriate as return opportunities were possible despite volatile markets and decreased cash returns, Principal Global Strategic Income Fund co-portfolio manager Darryl Trunnel told InvestorDaily.
“We are looking to an index, but we’re being index aware [so] having duration in the portfolio means we could be hedged and not have very much interest rate exposure, or if any, in a period of rising rates, and when rates are falling we could have that exposure,” Trunnel said.
“This is a hybrid approach to the traditional strategy.”
Most fund managers had not strayed very far from the weightings of different sectors and bond classes from the index, he said.
“Yet if you looked at the last calendar year, money was leaving traditional fixed-income funds and that’s likely to continue,” he said.
“Some of that is compounded by interest rates falling globally, but some of it’s also due to the shift to more active management.”
He said a time horizon of three or five years, as opposed to quarterly or annually, allowed for a long-term focus, resulting in opportunistic allocations for returns and protection from risk inherent in traditional index funds.
“We actively manage those spread asset classes and adjust the allocations opportunistically. This approach brings together the best of both worlds,” he said.
PIMCO head of global wealth management in Australia Peter Dorrian said in the past six months he had seen growth in new flows into diversified fixed-income strategies.
“Advisers are looking to find very active managers who are able to avoid the riskier parts of those indices and get out of those parts of Europe where there are high levels of risk,” Dorrian said.
“Or they’ve switched into a portfolio that gives them greater exposure to Australia through a more hybrid approach or diversified fixed-income fund. That’s a big trend.”
In addition, advisers were generally becoming more comfortable with the notion of a diversified style when it came to fixed-income products, he said.
“They’re leaving those decisions to the fund manager as opposed to making allocations to different sectors themselves just because the future looks so tricky and it’s so hard to forecast where things are going. That’s something I’ve observed on a broader portfolio construction level,” he added.
