Investing in Fixed income is an integral part in an investor’s diversified portfolio. It is a relatively low risk source of income compared to other asset classes which means yields for this asset class are lower.

However there is now a wide range of Fixed Income assets which gives investors more choice and the opportunity to invest in higher yield but greater risk Fixed Income Assets.

Most global markets are correlated and government bonds are an asset class that shows no long-term correlation with equities or other riskier assets. Government bonds can therefore be used to diversify portfolio risk and offer stability during times of high markets volatility.

Why Invest in Fixed Income?

Fixed Income offers the opportunity to diversify by geographical location as well as tolerance of political or sovereign risk associated with investing in any given sovereign market.

Core government bond returns show no long-term correlation with equities, while riskier assets such as high yield and emerging market bonds show a positive correlation.

Even though these riskier asset classes often trade in a similar direction to equities, their correlations with equity markets are lower than the correlation between major stock markets.

The variety of Fixed Income asset classes gives an investor plenty of opportunity for diversification, by geography and by level of risk.

When investing abroad, you need to decide whether or not you want a return that is hedged back into your investing currency, and is therefore effectively the local currency return.

In the current environment of very low yields from core government bonds, higher risk Fixed Income asset classes have become popular since they can offer an income that can compete against inflation.

Corporate bonds (credit) come in two distinct categories: investment grade, which tends to be sensitive to interest rate changes, and high yield, which is more sensitive to changes in the risk of default.

Risks Associated with Fixed Income

Market risk: the value of assets in the Portfolio is typically dictated by a number of factors, including the confidence levels of the market in which they are traded.

Operational risk: material losses to the Portfolio may arise as a result of human error, system and/or process failures, inadequate procedures or controls.

Liquidity risk: the Portfolio may not always find another party willing to purchase an asset that the Portfolio wants to sell which could impact the Portfolio’s ability to meet redemption requests on demand.

Custodian risk: insolvency, breaches of duty of care or misconduct of a custodian or sub custodian responsible for the safekeeping of the Portfolio’s assets can result in loss to the Portfolio.

Interest rate risk: when interest rates rise, bond prices fall, reflecting the ability of investors to obtain a more attractive rate of interest on their money elsewhere. Bond prices are therefore subject to movements in interest rates which may move for several reasons, which may be political as well as economic.

Credit risk: The failure of a counterparty or an issuer of a financial asset held within the Portfolio to meet its payment obligations will have a negative impact on the Portfolio.

Derivatives risk: certain derivatives may result in losses greater than the amount originally invested. Counterparty risk: a party that the Portfolio transacts with may fail to meet its obligations which could cause losses.