After years of stocks ruling portfolios, investors are eyeing bonds, fueled by attractive yields and strategic rebalancing. A survey commissioned by Managing Partners Group revealed that most investors (57 percent) saw their portfolios as underweight fixed income. So, almost every allocator (99 percent) plans to increase their exposure within 18 months.
Per the survey results, 66 percent intend to raise allocations by 10 percent to 15 percent, while an additional 23 percent plan even larger increases. Industry insiders said that this made sense. After all, bond yields have reached levels not seen since the global financial crisis, making fixed income more attractive.
“Investor interest in increasing fixed income allocations is likely tied to a combination of relatively attractive bond yields versus lofty valuation levels for stocks,” said Wilshire’s senior advisor for investments Steve Foresti. “Shifting allocations a bit from stocks to bonds is a means of realizing recent performance gains in stocks, while somewhat mitigating downside risk.”
In addition to yields being high in a more normalized rate environment, Jeff Schwartz, president of Markov Processes International, said that “investors are continuing to rebalance from equities after two years of solid appreciation, especially for domestic stocks.” He added that strategic allocators are shifting from winners to lagging asset classes, while tactical investors, are looking to lock in stock gains while reducing equity risk.
“Credit spreads are historically tight, however, making risk management important,” Schwartz warned.
Michael Rosen, CIO of Angeles Investments, noted that many investors have guidelines to sell what has outperformed and buy what has underperformed, which keeps their portfolios’ risk profiles aligned with targets and prevents allocators from making emotional decisions, “which are often wrong.”
Rosen also advised investors to reexamine the underlying assumptions of their asset allocation and ask themselves what the role of fixed income is in their portfolios, “given current yields and inflation prospects.”
“Should investors change the mix, of duration or credit, for example, within the fixed income portfolio to align with current market conditions?” Rosen asked. “Automatic rebalancing is a useful tool but must be accompanied with a reexamination of assumptions and current and prospective market conditions.”
Wilshire’s Foresti noted that while “today’s yields position bonds to look relatively attractive,” reverting to a 60-40 portfolio may fall short of addressing future challenges. So, a shift from equities should include diverse assets like inflation-linked bonds, real estate, infrastructure, gold, and commodities to hedge against inflation.
