Nearly half of advisers and 55% of wealth managers we surveyed during Q4 last year expect a UK rate rise in 2015, while 43% of advisers and 47% of wealth mangers expect a US rate rise in 2015.
Avoid the UK home bias
Our research shows that those advisers and wealth managers looking to diversify away from UK corporate bond funds favour UK strategic and global bond funds over short duration, high yield, emerging market debt and Asian fixed income.
Some 40% of advisers and 49% of wealth managers identified global strategic bond funds, while one third of advisers and wealth managers identified UK strategic bond funds as their favoured option to diversify away from UK corporate bond funds.
The case for diversification away from the UK was definitive, with 86% of wealth managers and 78% of advisers believing it will be necessary to do so.
Rising UK interest rates is the most likely trigger for a move out of UK corporate bonds and into other fixed income products with 38% of advisers and 33% of wealth managers saying a rise could trigger them to move client money.
A strategic approach
Global and UK strategic bond funds could benefit from rising rates with nearly half (48%) of advisers saying they would favour global strategic bond funds and 35% UK strategic bond funds as a cushion to rising interest rates.
Interest rates will clearly rise but they are unlikely to rise in a continuous straight line and will only do so relatively slowly. Therefore, irrespective of the challenging backdrop, all segments of the bond market have a role to play within client portfolios.
It is the emphasis of each particular area of the asset class that investors need to pay attention to and ensure portfolios are properly diversified as a result. The key point is that investors need to add a degree of flexibility into their fixed income portfolios.
The research also highlighted the growing importance of emerging market debt to a diversified investment portfolio, with 65% of wealth managers and 53% of advisers saying that it will play a more important role over the next 10 years.
Low debt, demographics and sound fiscal and monetary reforms in many developing nations in recent years make emerging market debt a compelling investment opportunity. Many investors remain over-exposed to low-yielding developed sovereign bond markets at the expense of higher- yielding emerging economies.
Part of the appeal of emerging markets is their generally healthy demographics which are leading to increased domestic demand from growing populations willing to spend their disposable income at home. Meanwhile, many emerging markets are not saddled with the level of debt of many developed markets.
Nearly two-thirds of advisers (64%) also urged fund management companies to keep fixed income investments simple at the expense of innovating more and using derivative structures.
