While investors previously thought of fixed income as low yield government bonds or “junk” corporate bonds, the market has now developed enough depth across each investment option to provide investors with a broader range of credit qualities, maturities and issuers, portfolio manager at Neuberger Berman Vivek Bommi said.
Speaking to Nest Egg, Mr Bommi said now is the ideal time for Australian investors to look at fixed income assets.
“Looking at the global high yield bond market in particular, we see it as an attractive asset class given its strong growth,” he said.
The US makes up 60 per cent of this market, with Europe comprising 20 per cent and emerging markets the rest.
With this in mind, Mr Bommi argued, “On size alone investors can no longer afford to ignore European and emerging markets’ high yield; throw in recent outperformance from the former, extra yield from the latter and meaningful diversification benefits from both, and we see high yields as now a global opportunity offering true diversification.”
He said “uncertainty” around franking credits is also a good reason to consider fixed income, especially given that it is “typically less volatile” than equity instruments.
However, investors should also be aware that the risk/reward ratio follows suit.
“It’s timely for investors to consider other options with a similar risk/return profile that are less likely to be subject to sudden changes in potential returns to investors,” Mr Bommi said.
He said the main risks for Aussie investors are market volatility and the potential for US rate hikes.
“Investors have to be proactive with their portfolios to ensure they are protecting their capital in a rising rates environment and an increasingly volatile market,” Mr Bommi said.