While fixed-income portfolios have become riskier, a muted investment environment means that investors should focus on diverging from hidden risks, BlackRock Investments has said in a new paper.
Fixed-income investors should aim to mitigate risk rather than follow the chase for yield, BlackRock said in the report, entitled Forget Rotation: Think Risk Mitigation.
"Ultra-low yields mean safety cushions - to what extent a bond's income offsets a price fall due to a rise in yield - have turned into beds of nails," the paper stated.
"Rather than worry about the bursting of a bond bubble and/or salivate over a massive shift to equities, investors would do well to focus on these hidden risks."
The paper follows BlackRock's chief investment strategist, Russ Koesterich's visit to Australia during which he said investors need to focus on income rather than capital gains.
While the paper noted that the "great rotation" from bonds to equities is not necessarily on the horizon, US equities are currently trading cheaply.
With bonds continuing to trade at a premium and interest rates remaining low, investors who allocate in the reasonably priced equities market could well find a bargain.
"We prefer stocks to bonds and I would extend that even for income-oriented investors," Mr Koesterich said.
"In an environment where yields on stocks will not rate in an absolute sense, they look very attractive in a relative sense."
"So, even for more income-oriented investors there is an argument for raising allocation to stocks."
