How variety could be the spice of long-term investing
Investors could rarely achieve their investment goals by focusing on just one asset. Find out why.
As the global economy is gradually recovering from the fallout of the global public health crisis, interest rates are expected to stay low for longer to sustain economic activities. Currently, the search of income could be likened to a triathlon, and adopting a consistent yet flexible investment approach is essential.
Liquidity support
After the onset of the global public health crisis and the financial market lows in March, global central banks and governments have responded with monetary and fiscal policies that are unprecedented in size, timing and coordination.
The amount of US Treasury purchased by the Federal Reserve between mid-March 2020 and mid-June 2020 accounted for about 8% of American gross domestic product, the highest share ever since the US rolled out the first round of quantitative easing during the global financial crisis in 20081.
Winners rotate2
US Treasury stood out among major fixed income sectors in the first quarter of 2020 with a return of 8.2%, followed by developed market government bonds which returned 3.1%.
In addition to traditional US Treasury and government bonds, there are also other riskier fixed income assets that could offer relatively attractive yield and return opportunities.
High-yield (HY) corporate bonds3, for example, underperformed in the first quarter after a liquidity crisis. But in the third quarter, European HY bonds took the top spot from US Treasury with a return of 7.1% as market sentiment stabilised. Other HY sectors also rebounded in the second quarter with US HY and Asia HY ranked second and third, respectively.
2. Source: Barclays, Bloomberg Finance L.P., FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Aggregate Credit – Corporate High Yield Index (US HY), Bloomberg Barclays US Aggregate Credit – Corporate Investment Grade Index (US IG), J.P. Morgan Government Bond Index – EM Global (GBI-EM) (Local EMD), J.P. Morgan Emerging Market Bond Index Global (EMBIG) (USD EMD), J.P. Morgan Asia Credit Index (JACI) (USD Asian Bond), Bloomberg Barclays Pan European High Yield (Europe HY), J.P. Morgan Government Bond Index – Global Traded (DM Government Bond), J.P. Morgan Asia Credit High Yield Index (Asia HY), Bloomberg Barclays Global U.S. Treasury – Bills (3-5 years) (US Treasury) and Bloomberg Barclays U.S. Treasury – Bills (1-3 months) (Cash). Past performance is not a reliable indicator of current and future results. Yield is not guaranteed. Positive yield does not imply positive return. Data reflect most recently available as of 30.09.2020.
Low correlation drives diversification
The fixed income universe comprises diverse sectors, and their performance could vary as different factors come into play, including interest rate risk, credit risk, sovereign risk and liquidity risk.
Extended fixed income sectors such as MBS and ABS have underlying assets which are mostly loans extended to individuals, setting them apart from corporate bonds which are closely tied to company balance sheets. As MBS and ABS are tapping into the balance sheets of consumers, these extended sectors have lower correlation to corporate bonds.
A diversified fixed income strategy investing across sectors with lower or negative correlation could help broaden income and return potential while managing portfolio volatility.
Yields and correlations of fixed income sectors4
4. Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofAMerrill Lynch, J.P. Morgan Economics Research, MSCI, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Treasury (UST) Bellwether 10y (10y UST), Bloomberg Barclays US Credit – Investment Grade & High Yield (US IG & HY), Bloomberg Barclays US Securitised: ABS Index (US ABS), Bloomberg Barclays US Aggregate Securitised – Mortgage-Backed Securities (US MBS), Bloomberg Barclays Pan-European High Yield (Europe HY), J.P. Morgan GBI-EM Global (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit (JACI) (USD Asia Credit), J.P. Morgan Asia Credit (JACI) – High Yield (USD Asia HY), J.P. Morgan Asia Credit China Index (USD China offshore credit), J.P. Morgan CEMBI (USD EMD corporates), J.P. Morgan Asia Diversified (JADE) (Local Asia). *Correlations are based on 10-years of monthly returns. Yield is not guaranteed. Positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 30.09.2020.
Seeking yield as rates stay low5
Conclusion
In uncertain times, adopting a diversified fixed income approach that integrates traditional and extended fixed income sectors could help broaden income and return opportunities while managing portfolio volatility.
Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice. Forecasts/ estimates may or may not come to pass.
Diversification does not guarantee investment return and does not eliminate the risk of loss. Risk management does not imply elimination of risk. Yield is not guaranteed. Positive yield does not imply positive return.
1. Source: J.P. Morgan. Data as of 19.06.2020.
3. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. For illustrative purposes only, exact allocation of portfolio depends on each individual’s circumstances and market conditions. Yield is not guaranteed. Positive yield does not imply positive return.
5. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current or future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.