#ratehikes         #duration         #inflation

Major central banks around the world are poised to raise interest rates to combat rising inflation, and such policy moves can erode real returns. Real return refers to what is earned on an investment after accounting for inflation, which can erode an overall portfolio’s purchasing power.

To help manage an overall portfolio’s purchasing power against rising inflation, we share three pointers.

#1: Seeking out higher-yielding bond assets

• We expect most investors face the prospect of another year of negative real cash returns in 2022, or possibly longer. This means staying invested and seeking out assets that are likely to generate higher-yielding income have become more important.
  
  
• Traditional fixed income such as developed market government bonds have come under pressure amid elevated inflation, while some quality higher-yielding corporate credit³ and select emerging market debt (EMD) are presenting compelling opportunities¹.
  
  

#2: Actively managing duration²

• In fixed income investing, duration is a gauge of interest rate risk, showing how bond prices and yields will likely change when rates move. Generally, longer duration bonds may suffer more price decline in response to a rise in interest rate.
  
  
• Generally, duration positioning has served both as a risk management tool⁵ as well as a source of alpha. 
  
  

#3: Diversifying across the full fixed income spectrum

• Different bonds react differently as market conditions change. Interest rate volatility has increased with yields of traditional fixed income coming under pressure. Non-traditional fixed income sources, however, are presenting compelling opportunities¹ and potential for diversification.
  
  
• For example, the fundamentals of asset-backed securities⁴ are supported by strong US consumer sentiment. Non-agency mortgage-backed securities (MBS) continue to be supported by the strength of both the US housing market and the US consumer. We also have a favourable view on the dynamics surrounding multi-family commercial MBS, where long-term demographic trends continue to support fundamentals for those properties, and shorter lease terms allow properties to increase rents and cash flows in accordance with higher growth and inflation.
  
  
• Fundamentals within the high-yield credit³ market continue to look attractive on a go-forward basis as growth remains robust and corporate earnings continue to show strength. Additionally, the level of distressed debt and high-yield default have remained low.

Conclusion
 

With an unconstraint investment approach, the Fund invests opportunistically across multiple debt markets and sectors without benchmark constraints, harnessing our top convictions as we seek attractive income opportunities¹ while managing risk⁵ through diversification. We remain focused on allocating towards sectors where we continue to have a positive fundamental outlook and that, in our current view, continue to present attractive yield characteristics.

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.

Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return.

1. 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.
2. Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years.
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. Yield is not guaranteed. Positive yield does not imply positive return.
4. Securitisation is the process in which certain type of assets, such as mortgages or other types of loans, are pooled so that they can be repackaged into interest-bearing securities. Examples of securitised debt include asset-backed securities and mortgage-backed securities.
5. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

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