Matthew Wacher (left) and Ron Mehmet

Lonsec senior investment consultant Ron Mehmet likened himself to a rescue worker last year as he helped financial planners give advice to their fixed income investor clients when performances slumped.

“I felt like I was wearing the SES helmet for fixed income because there were a lot of planners ringing up saying: ‘I’ve got most of my most conservative customers in fixed income [and] we’ve never expected an absolute negative return. Why is fixed income producing minus 10 per cent at the moment? We’ve never seen this before’,’’ he tells Professional Planner.

A 35-year industry veteran, Mehmet had seen fixed income in negative territory before, in 2008 and 1994, showing a cycle of negative returns for fixed income cycling roughly every 14 years.

While 2022 was a larger performance slump than previously, Mehmet’s advice to investors was to sit tight.

“We tell advisors and financial planners that you stick to your customer’s five-year plan,’’ he says.

“You only lose money if you actually do a redemption from the fund. If you leave it there, more than likely your bond or your fixed income security matures. [Fund managers] roll it over and you’re going to get a higher running yield and more capital going forward.”

He adds when central banks begin to cut rates back to target ranges after they have tamed inflation, fixed income yields will go down and the prices of fixed income go up, giving investors a capital gain.

Active managers in fixed income markets would ensure the best performance when the Reserve Bank returned to tightening, Mehmet says.

“In this type of environment going forward, you need to have an active portfolio with a five-year outlook, and you need to be diversified,’’ he says.

“The key is diversified so you need to have some fixed and you need to have some floating, just like a person who has a home loan might do a cocktail will be fixed and floating.

While rates are rising, Mehmet says floating-rate strategies are needed.

“Which is great because portfolio managers of floating-rate funds want rates to go higher so they can give a higher-running yield or distribution to the clients every month or every quarter,” Mehmet says.

“But you also need the fixed-rate ones which might be showing a three-year capital loss because once the economy turns and the RBA goes from hiking back to cutting again, they’re going to make some decent capital gains.”