With government bonds playing an important role in many low volatility portfolios, can this traditional allocation staple still be considered a 'safe option' in today's environment of high prices and record-low yields?
Bonds have played a key role for investors over recent decades, offering solid returns against a backdrop of falling interest rates and portfolio protection based on a low correlation with equities. In recent years, this perceived 'safe asset' has been in high demand as investors, fearing the worst from equity markets and declining growth expectations, sought to avoid risk.
But with an interest rate increase seeming almost inevitable soon, the economic picture does not look positive for bonds on a forward-looking basis.
So if traditional fixed income cannot provide the required risk/return profile, are there other assets that can?
We would highlight select absolute return products as a realistic option, and whilst we cannot guarantee, as with any investment, that these will make money, they do have the ability to deliver real long-term positive returns, something the richly valued bond markets may struggle to do from here.
Unlike long-only fixed income funds, absolute return strategies can invest across a wide array of asset classes as well as utilising derivatives. These instruments are not used to inflate returns, but rather to limit the risks associated with investing in global markets. To capture this, GAM's risk-rated model portfolios invest in a range of absolute return products, ranging from equity long/short funds through to global macro funds, with the intention of capturing positive returns at a low level of volatility, something that traditional fixed income funds may struggle to achieve going forward.
We are not arguing for a wholesale move away from fixed income strategies (we do hold some esoteric fixed income positions), but the current environment calls for a different, more modern, investment approach. Absolute return products needn't be scary, indeed they may be exactly what we need to navigate the current investment environment: generating steady cash-plus returns whilst limiting risk.
|Portfolio name||Attitude to Risk||Risk Rating|
|GAM Star Defensive||Balanced||3|
|GAM Star Cautious||Balanced||3.5|
|GAM Star Balanced||Moderately Adventurous||4.1|
|GAM Star Growth||Moderately Adventurous||4.8|
|GAM Star Global Equity||Adventurous||5.6|
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