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
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
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.
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.
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 CapabilitiesProprietary Research
Our research encompasses fundamental, quantitative and technical analysis
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Rich or cheap valuation on:
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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.
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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.