A recently released market commentary from the Capital Group reminds investors that fixed-income investments should serve as protection from volatility, rather than as a means to obtain yield.
Referring to the current fixed-income market situation as the “post-post-crisis period"–characterized by lower asset price returns and more volatility–the piece suggests that bond investors have to adjust their expectations downward.
“Return expectations are much lower today and a far cry from the post-crisis period [from 2009-2014],” the report explains. “Adding insult to injury, it’s possible that these unimpressive returns may continue to be generated alongside increased volatility.”
The report identifies several crosswinds that contribute to the situation: interconnectivity of global economies and corporations; sluggish or decelerating growth in major economies; and attempts at monetary policy stimulus via low to negative key rates, to name a few.
Having said that, the report makes several recommendations for investors who want to include fixed-income instruments in their portfolios:
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- Don’t be afraid to own duration: As yields and returns are expected to remain low over the foreseeable future, there won’t be much to lose by investing in long-term, low-return securities.
- Watch for scope creep: Managers have been incentivized to venture further out on the risk spectrum for higher yields, but higher-risk fixed-income assets may be too correlated with the equity market. Investors should ensure proper risk management by making sure their equity assets and their fixed-income assets don’t move together.
- Allocate to capital preservation: “The primary purpose of fixed income in a portfolio should be to serve as the ballast to the equity sleeve,” the report explains. Therefore, any fixed-income component should provide protection against uncertainty first; steady income and returns should be considered only as possible secondary benefits.