One of the most popular queries we currently receive from clients is why they should invest in fixed income at all. Given the performance of bonds in recent years, it’s an understandable concern. After all, 2022 saw the average fixed income fund fall by a staggering 23% as interest rates surged. Not only did bonds fail to protect capital; in fact, they dropped nearly twice as much as equities and even today, developed market sovereign bonds remain underwater had you invested at the beginning of 2022.
Meanwhile, cash accounts offer similar income levels to sovereign bonds but without the volatility and equities have delivered outstanding returns. It’s no surprise then that investors are flocking to the best-performing assets, leaving bonds out in the cold.
After all, this has happened before, and in November 2022 we were inundated with the question – why shouldn’t I just invest in Cash? Since then, we have seen almost all risk assets rally, and multi asset portfolios have delivered high double-digit returns (for more information about the IBOSS portfolio performance over this period please see our Monthly Performance updates).
So, are we in a similar position with fixed income assets now, and could Fixed Income be a key area of opportunity from here?
The Case for Fixed Income Today
- Interest Rates Have Already Come A Long Way
The dramatic interest rate hikes that caused fixed income to suffer may be largely behind us. This means that the risk of further significant declines in bond prices (capital loss) has reduced considerably. - Fixed Income Offers an Attractive Yield
With bond yields at much higher levels than in recent years, fixed income is now offering a compelling income stream. Investors can now lock in yields that were unavailable during the ultra-low interest rate era. - Potential for Capital Growth if Rates Fall
If central banks begin cutting interest rates in response to slowing economic growth or easing inflation, bond prices could rise. Unlike cash, where the only effect on a portfolio is reduced interest received. For example, UK gilts have suffered alongside global fixed income, but if interest rates start to decline, gilts could see meaningful capital appreciation. Investors could benefit from both strong yields and capital growth.
- Bonds Can Offset Equity Market Falls
One of the core reasons for holding fixed income is diversification. Bonds historically act as a counterbalance to equities, reducing overall portfolio volatility. While 2022 was historically unique, the long-term relationship between bonds and equities suggests that fixed income could once again provide protection in times of market stress.
Given the clear risks in equity markets – whether due to economic slowdown, geopolitical concerns, or stretched valuations – having a stabilising asset class like bonds in a portfolio could prove invaluable.
So what do we think?
While bond markets are likely to remain volatile, we believe this presents an opportunity for bond managers who can alter their position accordingly while capturing attractive yields. Our focus is selecting managers with a proven ability to adapt to changing market conditions and make informed decisions on credit selection and duration.
That said, we continue to believe that diversification is essential. The risks of concentrating too heavily in one area, such as gilts, were acutely demonstrated in 2022, and we believe that an allocation to a broader range of fixed income assets can boost returns but just as importantly, reduce risk. As such we have allocations to a range of fixed income assets including, sovereign, emerging market, strategic, corporate bonds as well as cash.
Finally, it is worth mentioning that although cash remains a defensive asset, it lacks the ability to generate real returns, and its value continues eroding over time due to inflation. Fixed income, on the other hand, offers both income potential and, in the right conditions, capital appreciation.
In Summary
It is our view that several parts of the fixed income universe are giving investors a rare investment opportunity due many people wrongly extrapolating expected future returns returns from the experience of the last few years. With higher yields, potential capital appreciation, and portfolio diversification benefits, it’s worth reconsidering bonds as a strategic part of a multi asset portfolio.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
Data is provided by Financial Express (FE). Care has been taken to ensure that the information is correct but FE neither warrants, neither represents nor guarantees the contents of the information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Please note FE data should only be given to retail clients if the IFA firm has the relevant licence with FE.
IBOSS Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
Registered Office is the same: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.
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