The very good news is that there are effective fixed income investments, with compelling expected returns.
The rationale behind the renewed importance of fixed income lies in the current economic uncertainties and market complexities. Valuations detached from fundamentals, concerns over interest rates, and varied geopolitical factors underscore the need for diversified fixed income portfolios that offer resilience and enhanced risk-adjusted returns. Stretched P/E multiples, office real estate, gated private debt funds, concerns surrounding private equity valuations, and the ongoing uncertain path for interest rates are but a few of the reasons for this unease.
Unfortunately, bonds – the traditional fixed income solution, are highly dependent upon interest rates, yet the 3-4% expected total return from Canadian government bonds does not support most portfolio target returns. The blue-chip bond funds have generated losses so far in 2024, and over the past 5+ years, with returns barely positive over the past 10 year period. Therefore, investors are excused for their frustration with fixed income and the move toward alternatives to traditional bonds and bond funds to optimize portfolios.
The right fixed income portfolio can generate 6-8% on its own, along with the diversification and portfolio enhancing benefits that improve total portfolio risk and return metrics.
The consultants and investment professionals will confirm that the ideal make-up of the fixed income portfolio has evolved. It is no longer dominated by direct exposure to interest rates through traditional bonds and bond funds, and now includes investments in corporate credit, real estate, mortgages, infrastructure, and private debt, along with a much smaller complement of bonds or bond funds. They will also confirm that many combinations of these exposures, through funds, ETF’s and the right investment partners has saved portfolios and has thankfully massively outperformed traditional fixed income.
