Binning the benchmarks
04 February 2014
News, Asia, China, Global, USA, Europe
By Hui Ching-hoo
With traditional bond portfolios generally containing excessive interest rate risk, BlackRock suggests using an unconstrained fixed-income strategy as a more effective approach for bond investors in terms of generating consistent risk-adjusted returns as well as diversifying market risks.
Rick Rieder, chief investment officer of fundamental fixed income with the firm, tells Asia Asset Management that although traditional core bond funds have served investors well for years, with today’s low yield levels and heightened interest rate risks in terms of benchmarks, such as the Barclays Aggregate Index, in future generating performance may well be more challenging for these strategies. Simply, bond portfolios following a conventional benchmark are ill suited to a climate of rising rates, scarce supply and periodic volatility.
“And with interest rates likely to rise modestly at different points across the yield curve, amidst some rate volatility, investors should seriously consider a different approach to their fixed-income allocation in our view,” he says. “Furthermore, unlike traditional, benchmark-constrained approaches, an unconstrained strategy can invest across the full spectrum of sector, quality, maturity and geography, taking advantage of opportunities wherever they may be found.
“Instead of seeking to outperform an index, an unconstrained strategy pursues a more ambitious goal: consistent, attractive risk-adjusted returns across all market environments over the medium term. It seeks to do this by building a portfolio with a much more diversified set of risk exposures, dynamically adjusting them in acknowledgement of the reality of what is now a constantly evolving global market.”
Mr. Rieder goes on to say that global central bank intervention has made today’s fixed-income market dynamics quite complex: “While the US may soon emerge from its prolonged financial repression, we believe much of the rest of the developed world is likely to remain in a monetary-easing mode for some time to come, largely to allow for continued deleveraging. The rise in bond yields globally reflects some degree of economic normalisation, with decent economic growth in a US and Europe emerging from recession, along with a reduced possibility of a hard landing in China, and slowing emerging market growth. Any normalisation of monetary policy in the eurozone and Japan is likely to run well behind that in the US. In the end, flexibility and opportunism are the watchwords for fixed-income investors, as markets adjust rapidly to changes in economic prospects, monetary policy and secular dynamics that look like playing out differently in various parts of the world.”
In Mr. Rieder’s opinion: “Provided a manager has the resources and capabilities to make it work, unconstrained, flexible funds have the ability to dynamically alter their duration (a measure of interest rate risk) and credit profiles to seek the real (inflation-adjusted) income, diversification and capital preservation investors expect from their bond allocations.”
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