The quest for diversification and protection should take money managers around the world
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If you are diversifying equities into global and emerging markets, you should probably consider doing the same with your fixed-income ETFs.
That was the consensus during a panel at the Radius Exchange Traded Forum yesterday, which addressed how such vehicles can diversify your portfolio to minimize risk and open up options to beat benchmark returns.
Anthony Chouinard, vice president, ETFs, Ontario Mackenzie Investments and Robert DeRochie, senior vice president, client portfolio manager – fixed income, First Trust Portfolios, were joined by Alfred Lee, director portfolio manager, ETFs, BMO Asset Management and Todd Schlanger, senior investment strategist at Vanguard, to discuss issues around fixed income and what role it can play in your strategy in the light of costs and the struggle for alpha.
The ability of an advisor to get beyond home bias was an area where the panellists felt a portfolio manager could gain an advantage.
Lee said: “If you look at the levers with which a global portfolio manager can push and pull, it’s a lot more than a domestic portfolio manager. They can only play with credit durations, they are the main factors, so it’s tougher for them to outperform the benchmark.
“When you go global, there is also currency you can play with; you can identify areas that are less efficient so you can overlay those areas as well. We think from a global perspective it definitely makes more sense to go active but from a domestic perspective, passive makes sense as well.”
DeRochie agreed that there was additional value in looking around the world for fixed income. He said there were opportunities but added a note of caution around raising rates and the unwinding of quantitative easing.
He said: “We see a lot value in global bonds. That’s one area where we are actually increasing our allocations and recommending that to our clients.
“We think rates are going to trend higher around the world – the US is going raise rates three times this year and there will be multiple hikes next year. If you think about it, there is $14 trillion of quantitative easing around the world that is potentially going to start getting unwound, and that’s going to put pressure on bonds globally.
“Rates are going to go higher but we see opportunities around the world as well, and that’s something to look into.”
Chouinard believes it’s a case of matching up your global equity risk and being equally as prudent with your fixed-income allocation.
He said: “Ultimately, the reason most of us buy fixed income is for capital preservation and diversification in our portfolio. If you diversify in the way you do with equities in the global markets or the emerging markets, the same will apply and it will be the better balance of risk to those pullback positions with those global bonds.”
