Fixed Income Investing: Explore a spectrum of solutions
What is fixed income?
Fixed income plays a crucial role in investment portfolios by offering potential outcomes including regular income and diversification from stocks (or ‘equities’). Some areas of fixed income may also offer attractive returns.
Investing in fixed income commonly means buying securities called bonds. Bonds are effectively a type of loan issued by governments or companies when they need to raise money, say to fund a project or manage cashflows.
The loan is taken out for a pre-determined period-of-time, during which the lender – or bond holder – will usually receive a fixed rate of interest, paid at regular intervals in what’s known as coupons. At the end of the agreed period (‘maturity’) the original amount borrowed is repaid in full.
A fixed income fund may offer an efficient means of investing in a range of bonds from diverse issuers.
Understanding fixed income
Traditionally seen as the low risk portion of a portfolio, today’s fixed income markets may offer a broad choice of outcomes to meet different financial goals.
This is important in a low interest rate environment like we have today, where cash deposits and traditional safe-haven bonds such as those issued by developed market governments may not be paying adequate levels of interest or income to combat inflation.
Although fixed income seems complicated, there are essentially two ways in which investors use bonds to make money. The first is regular income generation from the potential coupon payments. The other is aiming to generate capital return by selling the bond before maturity to another investor for a higher price than originally paid, much as you would with equities. Bonds ‘market’ prices tend to fluctuate less than equity prices but can be similarly affected by supply and demand, as well as some specific factors described in the next section.
Because the price of a bond can move, so can the value of the income, referred to as ‘yield’. Yield is calculated as a percentage by dividing the coupon payment amount by the price of the bond (e.g. a bond priced at $1 paying a coupon of 5c has a yield of 5%). As the price can move but the coupon is fixed, the yield will move (inversely) with the price.
Fixed income risks
Comparing fixed income versus equities still tends to show the former as a lower risk option overall. However, fixed income seek to provide opportunities across the risk/reward spectrum to position portfolios for different environments and generate varying levels of income and potential return.
Interest rate risk
Bond prices usually move in the opposite direction to interest rates, so when rates are rising, bond prices may fall, and vice-versa. This is because bonds are riskier than cash, so investors need the incentive of higher rewards to use cash to buy bonds. When interest rates are low, demand for bonds is higher which pushes up prices – and vice-versa.
There is a risk that the issuer of the bond will default on its debt by failing to pay investors what it owes them. This risk varies with the credit-worthiness of the issuer and is reflected in their credit rating. Investors who take more risk by investing in lower rated issuers have the potential to achieve higher reward, and vice-versa. Issuers with a higher credit rating are considered ‘investment grade’ while those with a lower credit rating are considered ‘high yield’.
Liquidity risk is a measure of how quickly an investor could turn an asset into cash, if they needed to. In market environments where liquidity is low there is a risk that if a bond holder wanted to sell the bond, they may have difficulty finding a buyer, especially at a good price.
Inflation – the rate at which the prices of goods and services increases – can be a risk if the level of inflation is higher than the level of income made on savings and investments. The income paid by bonds is fixed so when inflation is rising, that level of income may be less appealing and bond prices tend to fall - and vice-versa.
A range of options to help investors reach their financial goals
Invest for a conservative profile
Invest for Total Return
Invest for Capital Growth
In einem unsicheren Umfeld mit niedrigen Zinsen und Renditen sind Anleihen mit kurzer Laufzeit (Kurzläufer) eine Möglichkeit für vorsichtige Investoren, die ihre Barmittel anlegen wollen. Auch sie sind nicht ohne Risiko, aber ihre möglichen Renditen sind höher als die Geldmarkterträge. Als Anlagen sind sie eher risikoarm und wenig volatil.
Investoren, die moderaten Wertzuwachs und laufende Erträge anstreben, bietet ein restriktionsfreier Ansatz die Chance auf taktische Anlagen in alle Bereiche des Anleihenmarktes. Er kann flexibel auf das Marktumfeld reagieren und orientiert sich an keiner Benchmark. Ziel ist eine bestimmte Rendite bei einem vorab festgelegten Risiko.
Investoren, die bereit sind, mehr Risiko einzugehen, können mit Anlagen in High Yield einen Schritt weitergehen, um noch höhere Erträge zu erzielen. High Yield bieten höhere laufende Erträge. Langfristig können sie denen von Aktien ähneln; sie sind aber in der Regel weniger volatil. Außerdem können sie ein gemischtes Portfolio gut diversifizieren. Durch Diversifikation, eine sorgfältige Einzelwertauswahl und ständige Kontrolle besteht die Möglichkeit der Risikosteuerung.
*Assets under management after delegation to the other asset classes as 31/12/2020(AXA IM Database)
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Fixed Income Quarterly Views