THE ROLE OF FIXED INCOME
Government bonds and fixed income have traditionally played an important role in portfolios for their ability to:
- generate income,
- preserve capital, and
- diversify equity risk.
However, it has become increasingly challenging for investors to find income as interest rates have reached historical lows in some countries, and even fallen below zero in others.
TWO MAJOR CHALLENGES INVESTORS FACE TODAY
1. Equity volatility
Market volatility and price fluctuations persist amid heightened geopolitical risks, a slowing global economy and ongoing trade tensions. Even in sound economic years, sizeable intra-year drawdowns are a normal feature of the equity market, as shown in the chart, especially 2018, where there were drawdowns even as the Australian economy was growing.
ASX 200 Index intra-year decline vs. calendar year returns
Source: FactSet, MSCI, J.P. Morgan Asset Management. Returns are based on price only and exclude dividends. Intra-year decline refers to the largest market fall from peak to trough in a short period of time during the calendar year. *Returns are shown for calendar years from 1994 to 2019 YTD as of 15.08.2019. Past performance is not a reliable indicator of current and future results.
Solution: Diversified portfolio
US Treasuries, mortgage-backed securities (MBS) and investment grade (IG) bonds have low volatility and – more importantly – low or even negative correlation to stocks. Allocating to fixed income can help build a resilient and diversified portfolio.
Different correlations to Australian equities
Source: Bloomberg Barclays, FactSet, Standard & Poors. Indices used: Australian equities: ASX 200; Treasuries: Bloomberg Barclays US Treasury Bellwethers (10Y); MBS: Bloomberg Barclays US Aggregate Securitised - MBS Index; Investment grade: Bloomberg Barclays US Aggregate Credit - Investment Grade; High yield: Bloomberg Barclays US Aggregate Credit - High Yield; EMD: Bloomberg Barclays Emerging Market USD Sovereign Index. All correlations based on monthly total return data in local currency for the period 31.12.1998 to 31.08.2019.
2. A world of falling or even negative yields
In September, the US Federal Reserve cut rates for the second time within 2019. Other major central banks have stayed accommodative, with some making deeper cuts into negative territory and restarting bond purchase programmes. Today, over a quarter of the global aggregate bond market are negatively yielding.
Source: J.P. Morgan Asset Management’s Global Fixed Income, Currency & Commodities (GFICC) team, Bloomberg, Barclays; in local currency terms. As at 09.09.2019. Shown for assets > 1 year maturity.
Solution: Benefit from multiple income sources
Yield can still be found, but may require an unconstrained approach to identify the best investing ideas. There are various types of bonds globally and they react differently to market changes such as interest rate movement and economic cycle. When managed properly, this could also mean added diversification in portfolios if alternative asset classes are included.
Source: Bloomberg Barclays, BofA/Merrill Lynch, FactSet, J.P. Morgan Asset Management. Fixed income sensitivity sectors shown are provided by Barclays and are represented by: Treasury Australia; Bloomberg AusBond Treasury indices; Investment-grade credit: Barclays Global Aggregate –Corporates; High yield: Barclays Global High Yield; EMD USD sovereign: Barclays Emerging Markets –Sovereign; EMD USD corporate: Barclays Emerging Markets –Corporate; EMD LC sovereign: Barclays Emerging Markets Local Currency Government; Floating rate: Bloomberg Barclays US Floating Rates Notes; MBS: Bloomberg Barclays US Aggregate Securitized –MBS. For illustrative purposes only. Change in bond price is calculated using both duration and convexity. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Australia. Data as of 30.06.2019.
Market volatility and lower yields are expected to stay. It’s time to embrace the challenges, differentiate and invest where opportunities can be found via an unconstrained and flexible approach.
Fixed Income Capabilities
Proprietary ResearchOur research encompasses fundamental, quantitative and technical analysis
Fundamental
- Macroeconomic data
- Corporate health figures
- Environmental, social and governance practices
Quantitative (valuations)
Rich or cheap valuation on:
- Absolute basis
- Relative basis (historical and cross-sector)
Technicals
- Supply and demand dynamics
- investor positioning and momentum
Integrated, multi-layered risk management
Multi-dimensional risk management is embedded at every stage of our investment process. Portfolio managers have ultimate responsibility for investment risk, with an embedded risk management function and an independent risk team providing additional layers of oversight.
The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.
Access to the power of a globally integrated team of investment professionals
278
Investment professionals* across sectors and markets
9
Investment locations
US$554 billion
Asset Under Management^
*Includes assets managed on behalf of other J.P. Morgan Asset Management investment teams. ^Includes portfolio managers, research analysts, traders and client portfolio managers with VP title and above.
Source: J.P. Morgan Asset Management, as of 30.06.2019.
J.P. MORGAN ASSET MANAGEMENT'S FIXED INCOME FUNDS
J.P. Morgan Asset Management employs a diversification framework that spans the entire fixed income universe. Every stage and component of the triangle can contribute to your portfolio's risk-adjusted returns.
Go beyond borders to hunt for the best income opportunities
For more information, please call or email us. You can also contact your J.P. Morgan representative.
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