Fixed income merits long-term vision


By Daniel Paperny

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Patience and resilience are necessary for investors when positioning fixed income portfolios to deliver a regular income stream in a low growth environment, according to Grant Samuel Funds Management (GSFM).

Speaking at an event in Sydney yesterday, GSFM director and head of distribution Damien McIntyre advocated for a longer term view for investors seeking to preserve capital, as many investors often overlooked the important defensive role that cash dividends played in a portfolio.

“It’s worthwhile to understand the whole point of diversification is to have managers which achieve different ends at different points in time as well as to clearly articulate the role of dividends in your portfolio,” he said.

In the context of GSFM’s global equities strategy, McIntyre said the fund manager looked to own companies that returned 6 per cent of their market capitalisation to shareholders every year in the form of cash dividends, share buybacks and reductions of debt.

“When markets become uncertain, investors want certainty and they gravitate back to dividends every time because there is clarity and comfort with dividends,” McIntyre said.

“When markets erupt, people just want peace and quiet; dividends will always be your friend when markets become uncertain and indeed volatile.

“Simply because dividends may be unattractive [now] relative to the benchmarks, which are at all-time highs across the world, just remember that this is the tale of the tortoise and the hare, and the tortoise wins the race in the long run.”

Payden and Rygel managing principal Scott Weiner noted that under current market conditions, investors were contending with falling interest rates in some economies and rising rates in others.

He said that while falling interest rates reduced a portfolio’s yield, rising rates could also negatively impact fixed income portfolios and this was particularly significant for traditional benchmark-aware bond funds, which were being left exposed to rising rates and were less focused on delivering absolute performance.

Weiner noted that one of the conventional assumptions many investors drew on was that the absolute level of high yield spreads is “a harbinger of deterioration” for high yield prices.

However, he said tight spreads merited further caution and investors needed to look at the strength of the financials of the underlying companies more closely in terms of what was driving this high yield spread.

“What the absolute level of high yield is or what it’s been relative to in near-term history has no correlation at all to the direction of return for that asset class moving forward, and that’s where history repeats itself,” he said.

“That’s really important to this asset class and to bonds in general.”

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