A representative of PIMCO says they believe the key is to invest in strategies that have the flexibility to invest across the full range of fixed income markets.
They say: “Multi-sector strategies that have the flexibility to invest across a range of sectors, geographies, credit qualities, and maturities allow you to diversify a bond portfolio.
"[By] balancing higher yielding and higher quality assets that perform differently in varying growth environments, opportunities can be accessed around the world no matter which way the markets and interest rates move. This can provide attractive income potential while maintaining a close focus on risk."
Haig Bathgate, head of investments at wealth manager Atomos, says with government bonds yielding 5 per cent, compared to the long-term average return from equities of 7 per cent to 8 per cent, "it's a no brainer to have government bonds in a multi-asset portfolio".
"But the other thing that has changed is that, for the first time in 20 years you can get an income from bonds. If you are looking at the bonds with more credit risk though, you have to ask yourself, are you getting paid enough for the extra risk? Especially when you consider that you need to have some income growth in portfolios, and that is what equities can provide.”
Rathbones' fixed income director Bryn Jones says his way of solving the above conundrum is to be long duration on the government bond exposure and short duration on the bond with the greater credit risk.
This is because he feels that longer-duration bonds should offer protection from an economic downturn, while those with more credit risk are shorter duration, but offer a higher yield, to ameliorate this.
Jamie Niven, fixed income investor at Candriam, says the longer-term path is for inflation to be higher than many investors had become used to, however due to the impact of the aggressive hiking cycle, he favours holding duration right now. He adds that one of the risks which investors with income as a focus face is that they buy higher yield and risk the capital value of the bond falling.
In contrast, he says that owning government bonds may deliver a capital return next year, even if the yields are lower.
Kevin Thozet, who is part of the investment committee at Carmignac, says the sell-off in long-dated government bonds now “more than reflects” the changed inflationary environment – essentially his view is that the opportunity for capital gain is now in this asset class.
David Thorpe is special projects editor at FT Adviser
