Speaking at the Morningstar Investment Conference last week, Schroders head of fixed income and multi-asset Simon Doyle said that despite the historically low interest rates, investors wondering if they should move out of the bond market are asking the wrong question.
“I actually think the big question should be, 'are [bonds] less effective in terms of hedging the risk of equities in the portfolio', it shouldn’t be ‘what do we do about fixed interest’ necessarily,” Mr Doyle said.
“It should be that you’re actually thinking about the size of equity allocation in your portfolio because the ability to diversify that way is actually diminished by the current relatively low yields.”
Mr Doyle said the current view that investors should allocate out of fixed income is flawed and doesn’t take into account the role it plays in a portfolio.
He said it is important that investors look at the diversification value of fixed income, as well as its ability to preserve capital.
“We’re in a world that is inherently uncertain … so fixed income still has a role,” Mr Doyle said.
“The returns on balance for fixed income will be lower simply because the reality of the world is that yields are lower … but I don’t think that invalidates the role of fixed income.”
MLC Investment Management senior investment strategist Michael Karagianis said that while bonds are still an important element within a portfolio, investors should be looking at the shorter end of the bond market.
“The danger with long dated bonds at the present time, particularly international bonds, is that if at some stage the [Federal Reserve] stops buying bonds, there is a danger the yield curve spikes up,” Mr Karagianis said.
“What a lot of people don’t realise is that bonds actually carry a duration risk, and that benefited return on the way down can actually hurt you on the way up.
“So I think the shorter end of the yield curve in this sort of environment is attractive because it offers similar yields, but it doesn’t have the same duration risk.”
