Getting the most out of fixed income

Bond markets are starting to enter a phase of stability but investors need to choose their strategies carefully, according to Stuart Piper, MLC Investment Management portfolio manager - fixed income. 

At a time when consistent income is becoming increasingly important, Piper said Australia's economy is sitting in a good position, with gross domestic product at around 3 per cent and an inflation target of 2.5 per cent. 

"The thing that really causes bond markets to go pear-shaped is when central banks start tightening policy - and that does seem a long way off," he said. 

Since the global financial crisis, however, most developed nations have been heavily deleveraging, one of the consequences of which is that over the long term, Australia's official cash rate may be lower than history suggests, according to Piper. 

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Low consumption is influencing the current low interest environment and we should expect this to last for a long time, he added. 

"One of the things that I think is under-represented in the Australian market is that we don't have a high-yield investment-grade credit market on the menu for most investors," Piper said. 

"If you look at the historic returns, they are a bond, they give equity-like returns and payout in the form of income." 

While he doesn't expect bond rates to necessarily rise in the current environment, Piper said investors can still benefit by diversifying their fixed income portfolio with allocations to investment-grade emerging market bonds and Australian bonds. 

Allocating to floating rate bonds - hybrids - or reducing the hold duration relative to traditional bond indices is another strategy option. 

Piper added that global absolute return strategies get the best of both worlds - cash and equities - by holding uncorrelated alpha return sources with no systematic exposure to interest rates, foreign exchange or credit. 

"We know yields are low, but I don't think the base case is for recession," he said.