Investor allocations to bonds have been low in recent years with many investors preferring to hold cash or money market funds instead. In the period of low/rising bond yields and high deposit rates, this made perfect sense. Now, as we enter the next phase of the interest rate cycle, this is no longer the case.
20 Aug 2024
AUTHOR | Alexander Pelteshki, CFA, Portfolio Manager | Colin Finlayson, CFA, Investment Manager
Investor allocations to bonds have been low in recent years with many investors preferring to hold cash or money market funds instead. In the period of low/rising bond yields and high deposit rates, this made perfect sense. Now, as we enter the next phase of the interest rate cycle, this is no longer the case.
Interest rates have peaked; Central Banks are now set to cut interest rates and deposit rates, in turn, are also set to decline. At the same time bond yields are at attractive levels again, offering the opportunity for both income and capital appreciation.
For investors over-allocated to cash and underweight fixed income, now is the time to rethink this
The question is how best to allocate back into the bond market? With uncertainty and market volatility still present in financial markets, the decision on which area of the bond market to invest in can be challenging.
A solution to this problem is to choose a strategy that makes those decisions for you.
A way back into bonds - Aegon Strategic Bond strategy
We believe that a way for investors to get back into bonds and the best way to capture the return potential on offer from fixed income markets is through an active and flexible approach. By having the ability to invest across the fixed income universe and having active management of interest rate risk, this type of strategy can help capture the upside potential available but do so while better balancing risks that the bond market brings.
The Aegon Strategic Bond strategy does exactly that by providing investors with a way to access fixed income market opportunities in a fund that can be held through the cycle. The fund has a number of key attributes:
The fund actively allocates across core asset classes of Government, Investment Grade, High Yield and Emerging Market bonds to seek out the best return opportunities – by focusing on the more liquid parts of the bond market, this allows the fund to be dynamic in taking advantage of opportunities and managing risk.
What does flexibility mean for Aegon Strategic Bond Funds?
Source: Aegon Asset Management, as at 30 June 2024. Asset allocation and duration shown for the Aegon Strategic Global Bond Strategy representative account.
Another key attribute is the active management of duration risk. With the fund’s 0 to 10yr duration range, it not only has the flexibility required to take advantage of opportunities within fixed income markets but also the ability to protect it when market conditions change. We believe that this will be crucial looking forward as interest rates decline and investors seek more duration sensitive solutions. A switch in preference to higher (or lower) duration risk can be reflected within this fund due to the active use of duration risk through the cycle.
The expected returns from cash vs bonds are no longer compelling: Central Banks are cutting interest rates and bonds again offer an attractive yield and a more attractive total return potential. In allocating back into bonds, investors should favour a strategy that can deal with changing market conditions: allowing them to select one fund rather than having to switch between strategies. This is exactly what the Aegon Strategic Bond strategy is designed to do, and it has done so while delivering long-term outperformance. In addition, it has been consistently successful in capturing the upside from bond markets through its diversified range of alpha sources and by switching from top-down drivers of return to bottom-up factors through the cycle. This approach will be essential in the coming period.
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