While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Time to reset fixed-income portfolio construction
The team at The Inside Network met with Blackrock’s Asia-Pacific head of fixed income iShares, Darren Wills, and head of wealth, Chantal Giles, to discuss Blackrock’s positioning for higher inflation and what is driving the rapid adoption of fixed-income ETFs. Giles has done the full circle in wealth management. During her career, she’s worn many hats starting as a financial adviser, and then moving into operations and institutional. She returned to wealth at BlackRock, where she could help advisers along their journey.
And this passion can be seen by the way she describes BlackRock’s investment suite. “We use core building blocks in model portfolios, it’s a suite of products that can be core parts of multi-asset portfolios. The trend towards managed accounts makes everyone a multi-asset investor. Our suite of ETFs is set up in that way,” says Ms Giles.
Concerns over rising inflation and a global growth slowdown have many financial advisers re-positioning client portfolios away from risk and towards safety. Wills says, “Increasingly, investors are looking more at outcomes first, such as the expected return on targeting for a given amount of risk. They’re managing their asset allocations first as the key driver of returns.”
Wills goes on to say the second decision within those asset allocations is to determine the best way to achieve the outcome. He is seeing investors moving from where they may have traditionally sourced that to one or more fixed-income managers.
“Now they’re using fixed-income ETFs alongside those allocations to put more precision into their portfolio. In other words, they’re making more deliberate allocations to different parts of the fixed-income market, to achieve different outcomes,” he says.
These outcomes include investment strategies such as generating income from higher-yielding securities such as corporate bonds or high-yield bonds. Some investors may look towards capital preservation with shorter-duration corporate bonds or government bonds. Others may look at a multi-asset investment approach where a view of the overall portfolio is taken; that way, investors can see the effect that fixed-income is having from a diversification perspective.
When building a fixed-income portfolio, each asset’s correlation with the rest of the portfolio needs to be taken into account, so that it fits into the overall multi-asset strategy and it performs accordingly in various market environments. Investing in asset classes that demonstrate little or no correlation to one another may help enhance diversification and reduce portfolio volatility. The ideal portfolio will have a mixture of non-correlated assets in an attempt to reduce overall portfolio volatility in equities, and generate more consistent returns over the long term.
Wills says, “The outcome for the individual investor is the most important starting point. Whilst 60/40 is something that has traditionally been talked about when we construct our products, we offer clients a range depending on where the investor is in their stage of investing. Are they accumulating capital or drawing-down for income?”
What’s been true over the last few years is that yields in developed markets have been very low and they haven’t been fulfilling the role in a portfolio that they used to in terms of generating income, diversification versus equities and capital preservation. Over the past six to nine months, as inflation has become more persistent, central banks have moved quite aggressively to remove the stimulus that was put in place during the pandemic. That has repriced fixed-income, triggering a short-term spate of painful drawdowns. Going forward, this means that the expected returns are far more attractive than they were six to nine months ago.
On the core, Australian fixed-income is a lot more attractive having gone from 1 per cent to 3.5 per cent, which is a significant change. Previously, investors would have looked at Australian fixed-income and have erred against it, preferring alternatives or REITs for income generation. But a lot of the more traditional fixed-income areas are coming back into play.
Giles concludes by saying, “I think from a portfolio construction perspective, we’re seeing clients thinking a lot more about their fixed-income allocations. Investors are re-allocating back into core income-ETF exposures. Clients are thinking about duration, which is a good thing. Some are buying shorter-duration ETFs while others are on the longer-duration end. But, being able to have that broad set of tools where clients can make those decisions based on the duration of the underlying bonds and execute quickly, gives them the conviction to use those securities.”
These are issues that will be discussed at The Inside Network’s Income and Defensive Symposiums around Australia. Advisers are invited to register here.
