Financial advisers need to “distinguish between a tactical view and a strategic one” in order to successfully manage investment portfolios, according to Victor Rodriguez, head of Australian fixed income at Aberdeen Asset Management.
“The strategic view pertains to the very fundamentals of the asset class and when you’re thinking strategically, you’re allowing for all kinds of scenarios,” Rodriguez says.
He defines the tactical view as the actions taken in a short-term, 12-month period on portfolio construction, which is just too narrow a timeframe for assets such as bonds.
“A bond, at its most basic, is trying to price in future expectations and monetary policy,” Rodriguez says.
“In the instance that you get a downturn in equities of 30 per cent, for example, I find it very hard to believe it’s a scenario where central banks around the world are raising rates. The markets are certainly looking to price in cuts and that has a very powerful positive impact on bond prices, that is, bond yields fall, which means bond prices go up. This dynamic is long-term, it’s there, it’s strategic and it’s a core part of the asset class.”
He says bonds need to be thought of more in a defensive context as “it is a much more strategic concept [like] the way people talk about commodities as a hedge for inflation”.
In the Australian marketplace, Rodriquez says he is particularly concerned with “this idea that cash is the defensive asset class”.
“I wouldn’t say in a strategic sense that bonds have lost their defensive property at all, compared to cash.
“For example, an adviser’s got 60 per cent in equities for a client, 20 per cent in property and alternatives, and 20 per cent in bonds. They’re worried that if risks emanate, you don’t want treasuries and we’ve had this 20-year bull market for bonds, so this is the time to get out. So they go 20 per cent out of bonds into cash. Now the problem with that trade in a strategic sense is that they’ve just increased the risk of the portfolio for their client,” he says.
“In isolation, cash is clearly more defensive than bonds, even in that traditional fixed income space, you can get a negative return from that asset class if monetary policy gets tightened sufficiently in one year.
“If you look at bonds in isolation, most of the reason for investing in them goes out the door most of the time.”
Advisers must also change their approach by looking at portfolios as a portfolio manager would, not as a trader, according to Rodriguez.
“In other words, don’t look at each trade in isolation or each position, to the extent that there’s that negative correlation that comes from bonds versus your growth assets,” he says.
“And let’s face it, your average investor in Australia is very significantly allocated to growth assets like equities. That’s something that gets lost.
“Advisers and consultants have a longer time frame that they need to think about and be more strategic. In the Australian marketplace, our sense is that benefit – the negative correlation that brings diversification to an overall investment portfolio – gets lost when people think tactically.”
Justin Tyler, fixed income portfolio manager at Aberdeen, says too many advisers and investors are overlooking the strategic viewpoint and therefore, are not accomplishing objectives.
“Why is it that bonds aren’t in portfolios? The reason [against] investing is that there’s always more reasons to not do it than reasons to do it,” he says.
