Primary objective of fixed income within multi-asset portfolios
Bonds: provide a fixed income stream that can be more predictable than stocks. During periods of market volatility, the income generated from bonds can help provide a portfolio with stability.
Diversification: Bonds have different risk and return profiles than stocks. Investing in bonds adds diversification for your portfolio and can help reduce overall portfolio risk.
Challenges of fixed income investing
The ability of bonds to offer either of these traits has steadily diminished over the past decade. A long bull market flattened yields to record low levels, forcing investors to make a choice:
- Accept smaller returns by investing in government bonds at ever lower yields, or
- Chase higher yields in lower quality bonds and take on more risk as a result.
Recently, there have been significant changes in the fixed income landscape. In 2020, an incredible 90% of the government bond market was offering a yield below 1%, and more importantly, 40% was trading at a negative yield (see image). Not encouraging news for investors chasing yields. However, the year 2022 saw the supply of negatively yielding debt practically vanish where now less than one fifth are yielding less than 1%.
Global government bond yields
Source: Bloomberg, BofA/Merrill Lynch, J.P. Morgan Asset Management. Index shown is the BofA/Merrill Lynch Global Government Bond index. Guide to the Markets - Europe. Data as of 31 January 2023.
Things are looking up
While interest rates have risen, bond yields have also increased. Meaning investors can earn a higher yield on their bond investments. This increases their attractiveness within a balanced portfolio.
Global government bond real yields look more attractive than they have in 15 years
Source: Bloomberg, Barclays Live, J.P. Morgan, ICE BofA. As of 31 December 2022.
To further enhance yield, improve diversification, and manage interest rate sensitivity, a pragmatic approach would be to diversify the fixed income portion of a multi-asset portfolio, much in the same way lighting multiple lanterns instead of just one floating up to brighten the night sky.
Reap the benefits of an unconventional approach
Non-traditional fixed income strategies have more leeway when it comes to enhancing yield, improving diversification, and managing interest rate sensitivity.
Not only are they not bound by constraints or a benchmark, but they also have access to a broader investment universe and have more flexibility in adjusting to changing markets.
Take advantage of attractive risk-adjusted return potential through a less restrictive approach.
Benefit from improved diversification, downside protection and return stabilization by investing in assets uncorrelated to a core bond approach.