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Fixed income to remain a crucial portfolio allocation despite low yields, according to new Russell Investments report


News provided by

Russell Investments Canada Limited

Apr 26, 2012, 08:30 ET

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TORONTO, April 26, 2012 /CNW/ - Fixed-income investing will continue to play a crucial role for investors, even as three decades of bond-market gains appear likely to come to an end, according to a recently released research paper by Russell Investments entitled Fixed Income Investing in a New Yield Environment.

The research paper by Shailesh Kshatriya, CFA Senior Investment Analyst and Greg Nott, Chief Investment Officer, suggests that fixed-income investors shouldn't agonize about the prospect of diminishing returns as yields rise, since fixed-income securities hold numerous advantages beyond the recent price gains, such as risk mitigation and portfolio diversification.

The research argues there are four key themes that will shape how investors think about and approach this asset class going forward and that the current low yields should not panic bond investors. The first theme is that rising yields need not imply negative returns.

"A bond's total return includes both capital gains and income," Mr. Kshatriya points out. "Although rising yields will hurt the capital return portion, investors should also consider the cumulative impact of coupon and maturity payments being reinvested at higher rates. As well, rising yields enhance the future income return on bonds."

The second is that active bond managers have several tools at their disposal to mitigate the impact of rising yields. Thirdly, the paper argues that going beyond traditional fixed-income securities may be critical to enhancing overall portfolio returns. "Non-domestic exposure can offer significant income and return-enhancing opportunities relative to Canadian corporate bonds, which is where active management plays a critical role," said Mr. Kshatriya.

Finally, the paper notes that rising yields may actually hold benefits for investors approaching or in retirement, "Investors don't fully appreciate how higher yields can reduce the cost of liabilities in retirement," according to Mr. Nott. "As bond yields rise, the cost of funding future obligations, such as an annuity, decline as a result of an increase in the assumed rate of return. In other words, as your future assumed rate of return increases due to higher bond yields, less will be needed to fund future obligations."

The paper also argues that the attributes which make bonds an attractive long-term holding have not changed, i.e., providing income and diversification. With equities remaining the largest contributor to risk in a portfolio, fixed income will continue to be a viable source to counter that volatility. Therefore, a dramatic asset allocation shift in response to current low yields should take into consideration the implication on total portfolio risk. "Overall, the goal for investors moving forward is not necessarily to curtail fixed-income exposure ahead of eventual rising yields, but to ensure their asset mix continues to align with their risk-tolerances and long-term goals.

A full copy of the research paper is available at www.russell.com/ca

Important Information:

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Nothing in this publication is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This information is made available on an "as is" basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.

Russell Investments and the Russell Investments logo are either trademarks or registered trademarks of Frank Russell Company, used under license by Russell Investments Canada Limited.

Copyright © Russell Investments Canada Limited [2012]. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.

Retail-2012-04-24-0143 (EXP 04-13)

About Russell Investments

Russell Investments (Russell) is a global asset manager and one of only a few firms that offer actively managed, multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital markets insights, manager research, Indices, portfolio implementation and portfolio construction.

Russell has about C$155 billion in assets under management (as of 3/31/12) and works with 2,400 institutional clients, more than 580 independent distribution partners and advisors, and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.4 trillion in assets under advisement (as of 12/31/11).  It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.5 trillion in 2011 through its implementation services business. Russell calculates more than 80,000 benchmarks daily covering 98 percent of the investable market globally, 85 countries and more than 10,000 securities. Approximately $3.9 trillion in assets are benchmarked to the Russell Indices. 

Headquartered in Seattle, Washington, USA, Russell and has offices in around the world including Amsterdam, Auckland, Beijing, Chicago, Frankfurt, London, Melbourne, Milan, New York, Paris, San Francisco, Seoul, Singapore, Sydney, Tokyo and Toronto. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow us @Russell_News.

 

Media contact:

Beja Rodeck at 416-825-2125
For real-time news updates, follow @Russell_News on Twitter.      

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Russell Investments Canada Limited

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