Tjoonk, of NNEK, also increased his cash positions, even though it costs him “10 to 15 basis points” to keep cash. “At some point this will push us out of cash,” Tjoonk admits. “But we also have to manage risk, so we are in a difficult position.
A Barbell-strategy
This is not the only dilemma Tjoonk and his peers are facing at the moment. Every fixed income allocation decision entails a trade-off between risk and reward. The strategic changes discussed so far are all about reducing risk. But where do wealth manager find yield?
“We employ a Barbell-strategy in our fixed income portfolios,” says Bouma. “On one side we have short-duration bonds and cash, but we also increased our allocation to high-yield bonds and emerging market debt. There still is value there. Back in February, we added some US high-yield, when yields were at 10%. Such additions ensure we still get a decent yield for the fixed-income bucket as a whole.”
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Tjoonk and Weijand have also moved money to emerging market debt funds. This has been the favourite trade of the year with European investors. In the first eight months of the year, emerging market debt funds saw net inflows of almost €20bn, and almost half of the Netherlands’ fund buyers plan to further increase their allocation to the asset class over the next 12 months, according to Expert Investor data.
However, increasing credit risk and accepting a bit more volatility is only part of the answer to the challenge of low yields. There are more trade-offs to be made, and dilemmas to be solved. Reducing exposure to fixed income, for example, sounds sensible. But increasing exposure to equities, in these times of elevated macroeconomic and political uncertainty, doesn’t really.
So where to invest your money instead? These and other questions will be discussed in part two of this series, to follow soon….
