GSFM Investment Strategist Steven Miller

Investors are starting to turn away from traditional fixed income products like government bonds due to persistently low returns, and structural changes that are undermining liquidity, says Stephen Miller, investment strategist at GSFM.

Appearing on a media briefing with associated fund managers Miller said investors are “at a crossroads” with bonds, with yields entrenched at “historic lows”.

“There is a suggestion that as government bond yields approach zero they might not be effective as diversifiers for riskier assets in a multi-asset portfolio,” Miller said.

The alternatives are becoming increasingly sought after, he believes.

“For investors, this signals a need to diversify portfolios away from ‘vanilla’ beta to other assets – including gold, absolute and unconstrained bond strategies, and active equities including long/short and hedge funds.”

Gold hit a new all-time high in today’s markets of around $US1,978 per ounce.

Also speaking at the briefing, Payden & Rygel director Erik Souders agreed that absolute and unconstrained bond strategies – which eschew benchmarks and focus on returns over time – will become more prominent in the marketplace.

Regulatory changes have exacerbated the liquidity issues, he explains.

“Unlike equities, fixed income does not trade on an exchange, but rather over-the-counter, through a broker dealer community that facilitates all transactions. Heightened regulation in recent years has permanently impacted broker dealer capacity. Consequently, reliance on the broker dealer community for liquidity purposes is challenged in many environments.”

Fixed income liquidity has become more “fragile”, Souders commented, with prices “dislocating” periodically.

“This dynamic can impact entire asset classes, particularly during extraordinary periods like COVID-19,” he added.

Payden & Rygel, along with Munro Partners and Redpoint Investment Management, are fund manager partners of GSFM.

Souders stressed the importance for investors in researching their fixed income options.

“It is critical that investors remain patient… and take advantage of buying opportunities in a multi-asset bond portfolio,” he said.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at tahn.sharpe@conexusfinancial.com.au
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