Your clients are looking for income and yield opportunities.
That’s not easy to find: The past year has been full of geo-political risk, with elections across Europe and with the U.S. preparing for its upcoming presidential election, says Patrick O’Toole, vice-president of global fixed income at CIBC Asset Management. He co-manages the Renaissance Canadian Bond Fund, the Renaissance Real Return Bond Fund and the Renaissance Optimal Income Portfolio.
We’ve also seen uneven growth over the past few years; the economy often starts off strong at the beginning of the year due to renewed investor hopes, but there’s consistently both bad quarters and good quarters over the course of the year.
“We’ll continue to experience a see-saw economy, as well as continued sluggish growth,” says O’Toole. “As a result, people are buying more corporate bonds and more balanced products. Rather than focusing on growth and long-term investing, your clients are searching for more immediate yield and income.”
This past year, he’s seen investors increasingly jumping between risk-off and risk-on, he adds. And events across the globe have been rattling the market, making stocks look questionable.
“When this happens, liquidity is often injected into the market—be it in the U.S. or Europe—and this causes stocks and bond yields to move up once again. But, the soft economy always catches up and people start to get concerned that growth isn’t where they expected.”
Bond yields move back down once this shift happens, and they’re currently a quarter percentage below what they were in 2011.
Yet, O’Toole believes investors are rational; “they’re adjusting to a lower-return world and are realizing volatility will continue to be an issue as we continue to go through further deleveraging.”
The debt piled on before the crisis isn’t being depleted fast enough and will weigh on long-term returns. As such, investors are looking for yield elsewhere.
“They’re being pushed by central banks to do so, since rates are so low. In the U.S., rates are near zero and are forcing investors into riskier assets,” says O’Toole.
He says people often used stocks for the growth part of their portfolio in the past. Bonds, mostly government bonds and bond funds, were also used for passive investing.
And while there’s still demand for that type of portfolio, O’Toole finds investors are “also looking for ways to augment their returns on the fixed-income side by using more pure corporate bond funds, be they investment-grade, high-yield, or a combination.”
He adds, “Bond ladders were also used by used by retail investors and their advisors. It was a DIY approach to managing fixed income.” But, the credit crisis really woke people up to the potential volatility of the bond market.
That scared people straight, and resulted in more investors using professional management like they do on the stock side.
When helping these clients, O’Toole recommends doing extensive bottom-up research to protect against volatility. You should also ensure clients are diversified when buying bonds.
Further, understand covenants and the risks of the corporate bond market. It’s tough to access these products, so do extensive research before taking the plunge.