Rethinking Global Fixed Income
Kingsley Williams, CIO at Satrix
As investors are navigating uncharted waters in the wake of the coronavirus outbreak, market valuations and changes in medium-term macroeconomic assumptions will mean that what has worked in the past may not work going forward.
Now is the time to rethink fixed income portfolio construction, considering all investment styles and using indexing to build more resilient fixed income portfolios.
Inflation has come under control in the last decade and yields have fallen effectively to zero in many developed countries, making the case for investing in global bonds less obvious.
For South African investors, the most obvious advantage of bonds is the hedge against rand depreciation in instruments which have significantly lower volatility than global equities. The rand is extremely vulnerable to bad news around the world and we are living through a period in which there appears to be no other kind of news.
The high likelihood of negative global shocks also makes global bonds a very defensive asset class in its own right. Despite the large amounts of money being injected into economies everywhere, the concomitant pick-up in spending isn’t evident. This could send many countries into a deflationary environment. In this scenario, bonds act as a safe haven asset.
New Satrix ETF offers easy access to global bonds
The Satrix Global Aggregate Bond ETF listed on the JSE on 19 August 2020. It tracks the Bloomberg Barclays Global Aggregate Index and invests directly into the iShares Core Aggregate Global Bond UCITS ETF. This ETF holds investment grade treasury, government-related, corporate and securitised debt. US debt is the largest geographical exposure, followed by Japan, France and China. However, the exposure to the US is significantly lower relative to global equity indices. Currently the weighted average yield to maturity is 0.78% and the effective duration is 7.21 years.
The case for global bonds
In a recent webinar Kingsley Williams, Satrix CIO, reviewed the merits of global fixed income investing with Brett Olson, Blackrock’s Head of Fixed Income iShares in EMEA. Olson commented, “There are clear, long-term trends that will continue to drive the adoption of fixed income ETFs, such as transparency, access and efficiency. During recent market volatility, the resiliency of fixed income ETFs sent a clear signal to bond markets, serving to accelerate their adoption by many different client segments.”
Global bond ETF assets under management have surpassed the $1trillion mark globally, driven largely by a few long-term trends. An evolution in portfolio management over the last decade has led to a more outcome orientated approach, blending indexed and alpha-seeking strategies to try to meet specific investment goals. Further, modernisation of the bond market has increased efficiency and also enabled an increase in ETF innovation. These trends have facilitated an uptick in ETF adoption in active portfolio management.
Diversify globally
Allocating to global bond markets gives investors exposure to an asset class which is a natural complement to global equities, and can play a significant role in diversifying a portfolio. The size of the global fixed income market is $105 trillion. Global Bond ETFs only make up $1.4 trillion of this total. Growth has been significant with expectations that this number will double in the next few years. Global Bond ETFs allow investors to access this asset class tactically and strategically and at low cost. Global bonds provide exposure to a much greater and more broadly diversified number of interest-bearing securities across a wider range of markets and economic environments. While interest rates in developed markets may be at all-time lows, risk certainly is not.
