The diverse nature of fixed income requires investors to consider their independent circumstances, objectives and preferences before making an allocation to this asset class. In this article, we discuss the types of investment solutions available and some key considerations around investment objectives and fund selection.
Fixed income plays various roles within investor portfolios, depending on the investor’s risk profile. The purpose of this asset class is to provide a consistent income stream and to maintain capital value relative to growth asset classes.
A fixed income allocation within a growth portfolio acts primarily as a defensive asset, dampening volatility and offsetting weakness in equity markets. An allocation within a conservative portfolio however, is intended to generate income and display capital preservation properties. Fixed income investments within both can boost portfolio liquidity and capital stability.
Making an allocation
Considering the diverse nature of this asset class – covering sovereign debt and the spectrum of debt structures issued by corporations and other entities – choosing the right fixed income allocation to include in a portfolio can present a challenge for investors.
The Australian retail market offers managed investment solutions across:
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Traditional Australian bonds
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Global bonds
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Investment grade corporate bond funds
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Diversified credit funds
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High-yield funds
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Unconstrained bond funds
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Absolute return bond funds
Investing in corporate bonds – investment grade rated corporate bonds in the Australian market, and also in global bond markets, from companies in stable industries – is generally safer than investing in equities from the same company, and provides higher expected returns than cash, term deposits and government bonds.
How do I build an effective fixed income portfolio?
Building fixed income into a portfolio requires consideration of an investor’s particular investment objectives, and then choosing the fund that best serves to meet these objectives along with other considerations, including risk profile.
These objectives could include:
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Diversifying the risk attributes of fixed income (e.g. duration and credit)
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Providing a consistent income stream by allocating to the various fixed interest sub-sectors (e.g. corporate bonds and securitisation)
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Gaining exposure to income assets on a global scale
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Limiting absolute downside risk – capital preservation is paramount
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Ensuring that their portfolio is appropriately structured to match their risk profile
Considerations when selecting a fixed income fund:
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Does the fund achieve any of the common fixed income objectives?
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Do you understand the opportunity set and allowable allocations to riskier sub-sectors?
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Are you comfortable with having exposures to bonds in countries that have less stable political economic environments?
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Does any additional compensation justify investing offshore?
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What is the fund’s draw-down profile like?
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Does the fund behave in a manner you would expect from a defensive fund?
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Is the fund in line with client risk profiles and objectives?
Find out about investment opportunities with the AMP Capital Corporate Bond Fund.
Source: AMP Capital
David Carruthers, Head of Credit and Core
David leads the credit and core portfolio management team, and is responsible for macro credit research, portfolio strategy and risk utilisation. He contributes to the macro (rates and foreign exchange), macro credit and risk management group and is a senior member of AMP Capital’s Credit Investment Committee.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.
