Vast majority of advisors agree yield is back, but survey finds spit on performance of long vs. short duration
A recent global survey of financial advisors revealed overwhelming agreement that bond yields are returning, though economic factors are clouding other areas in the crystal ball.
A recent fixed income pulse survey of 350 US-based financial advisors who oversee $1.7 billion in client funds, which was conducted by Natixis Investment Managers and Loomis Sayles, found 89% agreeing that this is the best yield opportunity they have seen in years. Another 69% stated that this is the best return opportunity since before the global financial crisis
Although advisors are confident in the rise in yield, inflation continues to be their top risk concern (89%), followed by central bank policy uncertainty (56%). While 60% do not believe that inflation or interest rates have peaked yet, 69% agree that bonds would be more appealing if inflation were to decline.
Those who share this perspective are more likely to think that inflation has not yet peaked (71%), with 58% believing that short duration would do better this year. Of the 42% betting on longer periods, 55% believe inflation has already peaked. Bonds and stocks both suffered losses in 2023, leading 69% of investors to conclude that the two asset classes are still somewhat correlated. Thirty-two per cent are concerned about failing to enter the bond markets at the proper time. Eighty percent of respondents think it's critical.
“Interest rates at or near all-time lows have held bonds to historically low yields, forcing many investors to go further afield not only for income but also for risk management,” said Rick Raczkowski, executive vice president, portfolio manager and co-head of the Loomis Sayles relative return team.
He added, “After the past year’s rate hikes, 80 percent of advisors look to bonds to produce income, and three in four say that bonds once again are ballast in portfolios during times of volatility.”
With 85% considering it as a method to create income and 67% seeing it as helpful to reduce risk of loss, advisors regard fixed income as a strategy to manage portfolio risk and limit chance of loss. Fewer advisors are looking for fixed income to fill other traditional roles; instead, they are more interested in its abilities to generate income and manage risk.
While 45% of investors seek tax efficiency from their fixed income holdings, 47% seek total return from their investments. Government bonds' built-in duration risk and related credit risk are accountable for this.
Tellingly, two thirds (66%) of advisors are concerned high inflation may last longer than anticipated, half (50%) are concerned that this may cause rates to rise above expectations, and a third (33%) believe rates may remain higher for longer than anticipated. Credit spreads (27%) and other traditional fixed income worries like default risk (24%), liquidity (24%) and currency risk (13%) are far behind.
Those surveyed were less concerned about the credit and default risks since companies have had time to bolster their balance sheets and optimize their business processes in preparation for potential recessionary effects. Sixty-six per cent of advisors surveyed were concerned that high inflation may last longer than anticipated; 50% were worried about a greater-than-expected rise in interest rates, and 33% believed rates may remain higher.
Advisors predicted investment-grade bonds will outperform than high-yield bonds by 59%, traditional fixed income by 66%, and active investments by 77%. Nearly nine tenths (87%) of investors use bond funds, while 73% use passive ETFs, and 58% are adding active ETFs to their portfolios. Furthermore, 66% of investors believe that active ETFs are becoming a more compelling choice for fixed income.
“Many advisors recognize that their biggest challenge may not be when to increase their exposure to bonds but how to bring clients along in the decision,” said Dave Goodsell, executive director of the Natixis Center for Investor Insight.
The poll also revealed a raft of challenges for advisors when discussing bond funds with clients. Among the myths and misconceptions were that bonds should never lose money (59%), that they will not be burnt by bonds in 2022 (48%), and that fixed income is only for "old people" (38%).
“After a tumultuous year for fixed income investors in 2022, [advisors] will need to help clients overcome post-traumatic stress,” Goodsell said. “They need to re-educate clients on how rates and bonds work and show them why fixed income allocations are essential to a portfolio that can meet income, return and diversification goals.”
