Matthew Watcher (left) and Ron Memet
Ron Memet, a senior investment consultant at Ronsec, likened himself to a rescue worker last year, helping financial planners advise fixed-income clients when performance faltered.
“I felt like I was wearing the SES helmet of fixed income because so many planners called me: [and] We never expected an absolute negative return.Why are bonds producing minus 10% right now? We’ve never seen it before,’ he says. professional planner.
A 35-year industry veteran, Mehmet has seen bonds in negative territory in 2008 and 1994.
2022 will be a bigger slump than before, but Mehmet’s advice to investors was to stay still.
“I tell my advisors and financial planners to stick to their clients’ five-year plans,” he says.
“You only lose money if you actually redeem it from the fund. [Fund managers] If you roll over, you can get higher investment yields and more capital. “
He added that once the central bank starts to cut interest rates to its target range after curbing inflation, bond yields will fall and bond prices will rise, creating capital gains for investors.
Active bond market managers will ensure top performance when the Reserve Bank returns to tighten, Mehmet said.
“In this kind of environment going forward, we need an active portfolio with a five-year outlook and we need to diversify,” he says.
“Just like people with mortgages make cocktails, keys are diversified and require fixed and variable.
While interest rates are rising, Mehmet says a floating-rate strategy is needed.
“This is great because portfolio managers of floating rate funds want to raise interest rates so they can offer their clients higher investment yields and distributions on a monthly or quarterly basis,” says Mehmet.
“But if the economy turns around and the RBA goes from raising rates to cutting rates, we also need fixed rates that could represent a three-year capital loss. They will get decent capital gains.”
By allowing Callface’s fund managers to make these decisions, they can move quickly as they can move up to 20 basis points a day when markets change, he added.
Matt Watcher, chief investment officer at Morningstar Asia Pacific, said while clients and retirees were shocked by fixed income performance last year, most of him was in a defensive position holding cash.
“Whether it was the stock market, such as the big technology stocks, or bonds, the last year was very strong against the backdrop of bonds and very little duration. [because it] It gave us a real opportunity to spin towards it because it made them all more appealing,” he says.
Now, with interest rates rising, fund managers in multi-asset portfolios are investing significantly more in bonds, he adds.
“The areas that are important to us in these markets have seen the short end of the curve,” he says. “This is where we have been more constructive in terms of expected returns.”
He favored Australian bonds over emerging market bonds, some investment grade credits and international bonds.
“I still don’t think there’s anything to scream about when it comes to government bonds,” he says.
“If there was another inflation shock … interest rates would go up. We believe that we will begin to make up for some of the capital losses that are likely to occur.”
Fixed income will provide investors with diversification benefits if a recession-like scenario unfolds, but shifts to riskier bonds in emerging market bonds, US leveraged loans and Australian private debt. He said he could make more money if he did.
“We expect to get some benefit from bonds,” says Wacher. “If interest rates keep going up, you might lose a little bit, but that’s because the economy is still growing.”
This translates into a defensive retiree portfolio, he says, and holds a majority of its bond allocation to government bonds in both Australian and international bonds.
“You’ll still have a little bit of cash, but I think you can pretty much deploy most of the defensive elements into bond-type assets,” he says.