At a Crossroads: Shifting Gears to a Goals-Based Fixed Income Strategy
Since the Global Financial Crisis, traditional lines in fixed income investing have been blurred. Learn how a goals-based approach can help orient investors.
For traditional fixed income investors, much of the last 30 years have been nirvana; the 1980s began with double-digit interest rates that have steadily fallen, creating large amounts of bond return and income as well as crisis management along the way. Risk management came at so little cost and was so profitable to own that many investors essentially “over-insured” their portfolios. Going forward, we’re at a crossroads where high quality, traditional fixed income will always be a crucial bedrock for investment portfolios, but this “insurance” might become more expensive.
Since the Global Financial Crisis, traditional lines in fixed income investing have been blurred by large price swings, high duration risks and a proliferation of new strategies. This environment has turned fixed income from what has traditionally been a fairly straightforward asset class – one that seeks to provide downside protection and income – into one that investors may find disorienting:
This disorienting environment has created a slew of new questions, such as: “Is high yield the new risk manager, since it might perform better than Treasurys if rates rise?” or, “Even with rates near historical lows, are Treasurys still the best risk manager?” We think there has been too much focus on finding a single solution to answer these difficult questions. In our view, there is no single strategy to meet every client’s needs; we believe clients are much better served with a goals-based approach.
As we partner with thousands of advisors on a customized basis to help them solve for their clients’ needs, we can provide a goals-based approach which lays out three distinct types of fixed income objectives in our framework:
Each has its own benefits and costs in different market environments, and advisors are best served by having a balanced exposure to each and managing their clients’ expectations based on strictly defining the managers deployed for each objective.
This powerful framework helps organize the huge universe of fixed income managers and, most importantly, conveys a clear, forward-looking approach to fixed income for clients. You can read more about our approach to goals-based fixed income portfolio design.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Any risk management process discussed includes an effort to monitor and manage risk which should not be confused with and does not imply low risk or the ability to control certain risk factors.
Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.