Improving Prospects in the Fixed Income Market
Credit crisis spells opportunity for active bond managers
The market crisis has shaken investor confidence in equities and corporate bonds alike. As global markets regain their footing, investors will remain understandably cautious. However, the crisis has also presented compelling opportunities for experienced, active fixed income managers who are able to identify high quality corporate bonds at very attractive valuations as the market regains its legs.
Bonds help preserve your wealth
Due to the different characteristics of bonds and equities, both of these asset classes play an important role in a diversified portfolio. Traditionally, bonds have served as a hedge in economic downturns. In periods of economic expansion, bonds have typically underperformed stocks, but still generated positive returns. Historically, a prudent mix of fixed income and equities can lower the overall risk profile of your portfolio and smooth out long-term returns.
Corporate bonds: Turning adversity into opportunity
The recent bout of extreme market turmoil has had investors fleeing to the safety of government-issued bonds, which has driven the yields to their lowest levels since World War II. One area where bond managers are able to uncover additional yield for investors is the investment-grade corporate bond market.
Today, the difference in yields between corporate bonds and Government of Canada bonds has risen to historical highs to compensate the additional risk of owning corporate bonds. This is an unprecedented situation, which could present the best risk/reward opportunity in decades.
Belt tightening is putting corporations (and their debt) in better shape
Some high quality and relatively safe corporate debt is being tarred with the same brush as lower quality debt, presenting active fixed income managers with investment opportunities. Overall, Canadian financial firms are in good shape. Canada’s banking system was ranked as the world’s soundest against its global peers in the 2008-2009 World Economic Forum Global Competitiveness Report.
We believe that the recent crisis is making corporations to re-assess their risk exposures and capital structure. Firms will emerge from the credit crisis as stronger and better-capitalized entities. In time, concerted actions by policymakers from around the world should help the global economy regain its legs.
Benefits of an active fixed income strategy
Active fixed income management can be a powerful tool in times of volatility. Your bond portfolio can benefit from the expertise of active managers as they are ideally positioned to take advantage of market inefficiencies and proactively manage risk.
- Diversification. An actively managed portfolio is generally invested in a wide range of terms, issuers and coupons, reducing the risk of being over-exposed to any one segment of the bond market, reducing risk for investors.
- Risk management. In an actively managed portfolio, holdings are managed continuously to take account of changing views and the direction of interest rates, financial conditions and the creditworthiness of each issuer.
- Economies of scale. Higher investment minimums ($10,000+) are typically required to access corporate and higher-yielding bond issues. Active managers can take advantage of economies of scale to overcome the higher barriers to entry normally required to access corporate bonds.
- Cost savings. Institutional managers have lower per unit transaction costs due to the sheer volumes they buy and sell. Lower transaction costs benefit unitholders by helping to keep MERs low.
Get active fixed income management working for you
Investors seeking portfolio stability and yield in today’s bond market would do well to look toward portfolio managers who take an active approach to managing bond portfolios. Diversified fixed income mutual funds, such as RBC Bond Fund, are well positioned to take advantage of opportunities arising from the volatile market, while carefully managing risk. Talk to an advisor today about the appropriate asset mix for your portfolio and how you can benefit from an active management strategy.
