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paper seeks to tackle paralysis of bond investors

Fund manager Schroders is urging investors to prepare for the end of the 30-year bond bull market, by re-focusing their beta exposure and making greater use of unconstrained active strategies


In Fixed income, flexible outcomes: getting what you need from your bond portfolio, the firm’s global strategic solutions team highlights the long-term challenges facing institutional investors, given their historical reliance on developed world sovereign debt, and the low yields available from the asset class.

With traditional bond indices unlikely to meet investors’ future needs, the paper calls for a new approach to fixed income. First, active managers should be afforded greater mandate flexibility, it says, enabling them to better exploit opportunities while protecting against market pitfalls.

Second, investors should focus their beta on “a distinct subset of the broader asset class” to achieve the required result. And third, where it is possible to move away from the benchmark entirely, investors should seek strategies with absolute return, outcome-orientated targets.

‘No magic bullet’

“Investors are generally aware of the uncertain outlook for bonds and consequently for their existing portfolios,” wrote Schroders senior strategist Scott Lothian. “The debate on interest rate hikes is much more about ‘when’ rather than ‘if’, with the end of quantitative easing often viewed as a key catalyst.

“Many institutional investors are experiencing a degree of ‘analysis paralysis’ because the decisions that need to be made are justifiably daunting and the road ahead has many forks.

“Overcoming this paralysis will take time, resource and conviction. Unfortunately, there is no single ‘magic bullet’ replacement for the multi-faceted solutions bonds have delivered in years gone by.”

A PDF summary of the report can be downloaded from the Schroders website, here.