MARKET COMMENTARY

Staying Active With Bonds

What purpose do bonds still play (if any) in a multi-asset portfolio? Take time to learn our answers and why it’s critical to understand what’s in your fixed income portfolio.

08.03.2021 - Scott Guitard, Vice President, Portfolio Manager

In this current low-yield, low-return environment for fixed income assets, investors are understandably asking: What purpose do bonds still play (if any) in my multi-asset portfolio? Scott Guitard, Senior Vice President and Portfolio Manager, shares his insights on the current situation and today’s realities of managing fixed income portfolios.

Q: In your view, what purpose do bonds serve in a portfolio?

Scott Guitard: Bonds have traditionally played two roles. The first is to preserve capital and buffer equity risk, generally through government bond exposure. The second is to generate predictable income and/or grow returns, which is generally achieved via exposure to high- quality investment grade bonds and active management.

Right now, I believe there is considerable concern about whether bonds, particularly government bonds, can help preserve capital, particularly as the “cost” of holding them has increased.

Q: Can you elaborate?

Scott Guitard: Rising yields mean low and even negative returns for many government bond markets. I believe a lot of investors are concerned about the prospect of rising yields. However, we don’t expect a dramatic upswing for some time. We think central bank measures, introduced during COVID-19, could prove more lasting than originally anticipated. This includes lower-for- longer interest rates, ongoing quantitative easing, and the potential for more flexible inflation-targeting regimes. So, the return environment for bonds will be challenging, but by no means disastrous.

Government bond yields rising for the right reasons—better growth, inflation normalization, and a better economic outlook—may prove to be a headwind for some parts of the bond market but can still be a positive environment for your portfolio. Other assets may make up for the return challenges faced by developed market government bonds. For instance, a 60/40 or even an 80/20 mix of stocks and bonds can produce positive returns in this type of environment.

Q: What is your approach to managing fixed income portfolios these days?

Scott Guitard: We continue to hold some government bonds; however, we are active and discerning in our approach. As you can see in our asset allocation strategy on page four, we are underweight government bonds and focused on underlying funds, which hold bonds with shorter duration periods and higher starting yields issued by high-quality corporate issuers. This approach allows for greater overall return potential and less sensitivity to interest rate changes.

This is no time to be complacent about knowing what you own in your fixed income portfolio. From our vantage point, our underlying managers are active in bond positioning within sectors, quality, yield curve, duration, foreign exchange, geography, and single issuer names. These are all important means of helping maximize return prospects with the hedging characteristics fixed income is designed to provide. The days of buying and passively holding fixed income assets are gone, while the role of a nimble, actively managed bond portfolio remains true.

Take time to speak with your advisor or portfolio manager about how your fixed income portfolio is constructed.

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