The Return of Volatility: Time to Reframe Fixed Income Portfolios
Read how our Portfolio Construction Services Team believes a core, unconstrained and dynamic credit breakdown should fit into a goals-based fixed income framework.
When it comes to fixed income, 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 meet their clients’ needs, our Portfolio Construction Services Team distills our experience into general allocation size ranges across the three fixed income objectives in our framework: Defend with Core, Diversify with Unconstrained and Increase Income with Dynamic Credit.
As discussed in our previous research (see: Forecast Your Clients’ Needs, Not the Rates Market), even in the face of today’s rising rate environment, core fixed income’s role is as essential as ever: clients rely on their core bond allocations for capital preservation during equity market drawdowns. However, as we’ve consulted with advisors this year, there has been an alarming trend of abandoning core fixed income in the wake of expected rate increases by the Federal Reserve (Fed).
The Global Financial Crisis seems like a distant memory as the U.S. bull market has been cruising for over nine years. And after an all-too-comfortable 2017 where global markets churned higher, 2018 has delivered the return of volatility and a friendly reminder that equity markets can indeed go down (See February and October 2018). This recent volatility is as good an excuse as any to reassess your fixed income portfolios to ensure they are providing adequate downside mitigation.
As a result of abandoning core fixed income, we have noticed the lines have been blurred between a “Conservative” model and an “Aggressive” model. In other words, core fixed income is the primary tool to make a moderate portfolio truly “moderate.” We believe the majority (50%-75%) of most fixed income portfolios, for investors seeking the traditional diversification benefits of fixed income, should stay in the core.
Below, we reintroduce our framework with general allocation size ranges across the three fixed income objectives:
Outside of the core, we advocate considering allocations to both unconstrained and dynamic credit strategies. Each has its own benefits and costs in different market environments, and we believe 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 at: janushenderson.com/reframing-fixed-income.
No investment strategy can ensure a profit or eliminate the risk of loss.
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.