GB-EN Intermediary

Time to prune back on fixed income?

Kelly Prior takes a closer look at fixed income – an asset class where pickings are slim, and managers are having to work harder for returns
November 2021

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The last time we carried out one of our regular sector reviews of the bond markets, in January, we drew an analogy between finding the right investments and managing an allotment – a case of cultivating the best plants and sifting out the weeds.

Several seasons later, and our latest review of the sector suggests that it is beginning to feel like an autumn orchard: much of the best fruit has been picked and now could be the time to give the trees a prune before waiting for the next harvest.

While the adventurous investor could still go in search of the few remaining juicy apples, the truth is that easier, richer and less-risky pickings can probably be found in other areas.

Regular research

As a reminder, we conduct in-depth research into each of the various asset classes every six months. We speak both to managers in whose funds we’re invested, and to some where we’re not. We think this is the best way to keep everybody on their toes, challenge perceived wisdoms and ensure that our portfolios have the most suitable holdings.

For this latest review, we held a total of 13 meetings. Of these, ten were with managers with whom we’re invested, but we also met one who has been on our key reserve list, as well as exploring some new fund ideas.

With the worst effects of the pandemic appearing to be behind us, it was really encouraging that a number of these meetings were held face to face. We hope to conduct more in this way over the coming months.
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While bonds certainly have their benefits, currently the cost of missing out on the higher returns on offer in other asset classes means there are probably better places for investors to put their money.

Slim pickings

The bond fund managers we spoke to broadly agreed with our own view that the really good investment opportunities, certainly in terms of generating a healthy income from lending to companies, are now rare.

We do still have positions in the credit market, but these are very much with specialist managers — those who are extremely ‘picky’ in their selections, with the aim of identifying opportunities that the rest of the market has missed.

There are still parts of the overall bond universe where there is potential for investors to generate a good return. Emerging markets are one example; another is interest rates, where expectations are mounting that central banks will start to increase the cost of borrowing in the reasonably near term.

Doing their job

It’s worth remembering that our portfolios contain a wide variety of different types of investment. It’s important to us that we have holdings that offer stability and complement other areas, where returns might be more volatile, for example. This is often the job of bonds.

With low interest rates making the returns from holding cash look unattractive, the income that bonds provide means that they remain in demand. However, the opportunities to make handsome returns, as we’ve mentioned, are slim.

While bonds certainly have their benefits, currently the cost of missing out on the higher returns on offer in other asset classes means there are probably better places for investors to put their money.

Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.

Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original
amount invested.

Use our handy glossary to look up any technical terms you are unfamiliar with.

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