Investors should continue to hold bonds within their portfolio to offset the risks of the share market but reconsider the types of bonds they hold ahead of the expected global economic downturn, according to a US based investment firm.
Payden & Rygel portfolio manager Eric Souders said bonds still held a place within an investment portfolio as they offered returns on a risk adjusted basis alongside riskier share allocations but the traditional 60/40 shares to bonds allocation should be adjusted to include more multi-asset strategies.
“With an expected downturn in the global economy, it is important for investors to look to active management. They need to have more latitude around stock selection, and more latitude around interest rate duration, and not necessarily be tethered to a specific benchmark,” Souders explained.
He noted yields are higher in many fixed income intruments for the first time in the past three years and the current macro-economic environment was creating more opportunities to access quality bonds with good yields.
“When constructing a portfolio and deciding where to put capital, higher interest rates means including cash is more a comfortable decision for investors,” he noted.
“The same is true for those looking to invest in government bonds and high-quality investment grade corporate bonds.”
Souder added along with the potential yield on offer, investors were being rewarded for holding onto higher quality securities.
“Today you are getting paid to own higher quality securities. You don’t have to reach for yield. In fact the ‘reach for yield’ is almost the reverse of what it was years ago,” he suggested.
“Similarly, you don’t have to reach down the credit quality spectrum, or head further out on the yield curve, for returns. This means investors can be more conservative and defensive at the front end.”
He pointed out the long term outcomes for bonds were driven by central banks and government policy that could create volatility but this could be managed by a strategy focused on absolute return with a zero to five year maturity spectrum and moved capital toward higher quality assets.
“The bottom line is that bonds should play a more prominent role in portfolios today. But on the 40 side of that 60/40 equation, investors can perhaps be more creative around the types of bonds they are buying,” he concluded.''