For decades, bonds have been a solid anchor for portfolios that held steady through turbulent times. Then came the rising interest rates of 2022, which culled the values of existing bonds but dangled an alluring increase in portfolio yields in front of investors’ eyes.
The paradigm shift has been so great that some market experts have predicted the traditional 60/40 balanced portfolio ratio of equities to bonds could be “flipped around” as the appeal of fixed income rises.
Other investors remain unconvinced central banks will get inflation under control as quickly as the market expects, leading to further interest rate hikes and ongoing erosion in bond values. New forays into long duration bonds are, for many, a risky bet.
Speaking at Conexus Financial’s Fiduciary Investors Symposium in Singapore in March, Pictet Asset Management fixed income CIO Raymond Sagayam said fixed income is now compensating investors more than may other asset classes.
Investors are not getting compensated for the high price of equities, he argued. “The last time we saw the equity earnings yield down at these levels was back at the GFC,” he said, predicting a lot of pain still to come in equity markets.
Ten-year bond yields were looking a lot better, he said, and advocated shifting “from equities into fixed income assets in general.”
Sagayam predicted interest rates will plateau at a high level for some time, and argued the time is not yet ripe for buying full maturity credit funds as “there will be a much better opportunity to gain exposure towards the end of this year, maybe early next year.”
But he was very bullish on short duration funds and cash, which is “now an asset class in its own right” with a range of different options investors need to understand.
He also pointed to emerging markets where central banks “have been far more aggressive at hiking interest rates, they’ve been doing it early, it’s at a much higher magnitude, so you’re getting compensated.”
Speaking on the same panel, Farouki Majeed, chief investment officer at Ohio School Employees Retirement System in the United States, said a 60/40 investor in 2022 would have seen a negative return of 16 per cent.
While reserving judgement on longer duration fixed income, he said the short duration end of the fixed income market is attractive and, with financial assets set for rough seas in the coming years, the 60/40 portfolio “may have to be flipped the other way around” for the near term.
Investors will process these signals in a range of different ways depending on their convictions and risk appetites, but the rising allure of bond yields will be hard to ignore.
Sydney-based Family Wealth Advisory Sylvania principal and senior adviser Peter Clout tells Professional Planner he is “not using bonds any differently” and they remain a defensive asset he expects to provide higher yields, built into portfolios depending on how much risk the investor wants to take. But he has made changes to the types of exposures he takes to bonds.
With a lot of his portfolios belonging to retirees, he has moved some portfolios away from index funds to active managers that can hedge against duration risk.
“If you have an active manager that can manage duration, they did a lot better in 2022, something in the order of 10-20 per cent in some cases,” Clout says.
