But, with the triumph of Donald Trump and the increasing expectation that rates are finally going to start moving up in earnest, taking corporate profits with them, that lower-for-longer scenario has been turned on its head. Which has, in turn, added a new urgency to the question of what to do with one’s defensive bucket.
As David Riley, head of credit strategy at BlueBay Asset Management said in the firm’s 2017 outlook: “The beginning of the end of the era of central bank repression of market volatility and dispersion is underway.”
As a result, he added: “Real and nominal interest rates are much more likely to rise than fall over the foreseeable future, challenging portfolios built upon the even lower for even longer theme. Duration is now the key risk to investors’ capital, exacerbated by passive investment in ‘safe’ fixed-income benchmarks. Risk premia – credit, liquidity and alpha – we believe, will be the primary source of return for investors.”
Similarly, Bill Eigen, manager of the JP Morgan Income Opportunity Fund said on Friday: “The worst is yet to come for traditional fixed income investors. When a bull market persists for multiple decades, it jades people’s thinking. They don’t see the possibility of losing money in the asset class. Nowhere is this truer than in fixed income right now, and I hope that investors diversify before it’s too late.”
The problem facing many investors is that much of this has been said before and those self-same traditional areas of the market have continued to outperform, while many of the obvious diversification plays like absolute return and liquid alternative strategies have disappointed. All of which has left some investors understandably reluctant to revisit such strategies.
It might also be a mistake.
