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Four roles your bond portfolio should play
Flavio Carpenzano
September 23, 2022
KEY TAKEAWAYS
- Bonds can offer a variety of outcomes depending on investors’ needs and risk appetite.
- Global treasuries and investment-grade corporate bonds have the potential to provide income, capital preservation and diversification from equities.
- High yield and emerging market debt are among the few fixed income assets providing positive real yields in the current inflationary environment.
- Heightened volatility, policy normalisation and geopolitical risk could help make case for a flexible, active approach to investing.
Fixed income markets have experienced one of the most turbulent periods in their history so far in 2022, with the Bloomberg Global Aggregate and Bloomberg US Treasury indices both hitting historical lows. But with high-risk asset classes also selling off, many are questioning the role of fixed income. With that in mind, now’s a perfect time to revisit the question: why invest in fixed income?
In moments of uncertainty, it is important to stop and reflect on the basic role of fixed income in a portfolio. While the primary objective of investing in equity is capital growth, fixed income helps serve four key roles: capital preservation, income generation, inflation protection and diversification from equities.
As a fixed income investor, it is crucial to focus on the return of capital rather than the return on capital.
The fixed income market cannot be ignored as it is by far the largest securities market in the world and has grown tremendously both in terms of size and number of issuers.
Growth of major bond indices
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Past results are not a guarantee of future results
Data as at 31 December 2021. Date of inception for indices listed is 31 July 2001 (31 July 2002 for Emerging Markets Hard Currency and 31 January 2006 for Emerging Markets Local Currency). Global Treasuries: Bloomberg Global Aggregate Treasuries, Global Investment Grade Corporate: Bloomberg Global Aggregate Corporate, Global High Yield: Bloomberg Global High Yield, Global Inflation Linked: Bloomberg Global Inflation Linked Total Return Index, Emerging Markets Hard Currency: JPMorgan EMBI Global Diversified Total Return Index, Emerging Markets Local Currency: JPMorgan GBI-EM Global Diversified Total Return Index, Global Securitized: Bloomberg Global Aggregate Securitized. Sources: Bloomberg, JPMorgan
Four roles of fixed income
We believe bonds serve four key roles:
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Different fixed income asset classes can provide various outcomes for investors. For example, relative to the other asset classes, global treasury bonds historically offered an effective hedge against equity exposure; generally steeper yield curves, longer duration position and relatively low volatility makes this asset class ideal for capital preservation. On the other hand, high yield and emerging market bonds are better suited to income generation, given the higher nominal yield in these markets.
Risk factors you should consider before investing:
- This material is not intended to provide investment advice or be considered a personal recommendation.
- The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
- Past results are not a guide to future results.
- If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
- Risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.
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Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.