Investors continue to grapple with historically low US interest rates and the exposure they should take in portfolios to US aggregate benchmarked fixed income.
Boston — Investors continue to grapple with historically low US interest rates and the exposure they should take in portfolios to US aggregate benchmarked fixed income.
We believe that increased exposure to international fixed income offers investors a number of benefits, particularly when the volatile effects of currencies are hedged.
While developed market global interest rates typically move in the same direction as those in the US, the magnitude will vary and the moves will not always be exactly one for one. This varying degree of correlation and volatility can lead to pronounced differences in a country’s fixed income returns year to year, offering the benefit of diversification, but also the opportunity for adept active managers to benefit from country rotation to increase returns. Figures 1 and 2 give the returns of various countries in 2014 on a currency hedged basis.
The US fixed income market comprises only approximately 40% of the global fixed income universe (see figure 3) and in addition, the pace of growth in credit and securitized markets outside of the US continues to grow, offering a much broader opportunity set to generate returns.
Without simply allocating to higher volatility market segments on a structural basis, the reduced exposure to either high yield corporate or emerging market debt ensures a portfolio invested in primarily developed market, investment grade rated bonds. This can result in stronger risk-adjusted returns than the US aggregate benchmark, but with a similar volatility profile, an important consideration during periods of severe market stress.
As the Fed begins to normalize policy, it is important to note that global central banks such as the European Central Bank (ECB) or Bank of Japan (BOJ) and others will likely be much slower to remove policy accommodation, hence potentially limiting the downside in international fixed income markets.
A global portfolio, with the ability to fully hedge non-US dollar currency exposure can continue to offer investors the benefit of interest rate diversification without the material increase in volatility that may arise from unhedged currency exposure.
Increased divergence within central bank policy globally, in particular divergence between the US Fed and most of the rest of the world, can provide a rich backdrop of opportunities for active, tactical managers to deliver stronger risk-adjusted returns.
The structural advantages of a global approach are further accentuated by looking ahead to an environment where the US Federal Reserve may be the first major developed central bank to begin tightening policy while many other major developed market central banks continue on an easy monetary path to varying degrees.
US investors face a challenge not only due to the low level of domestic interest rates but also with understanding how US fixed income may fare in a portfolio context with US equities in the face of Fed policy tightening or other turbulent events. Moving to a global approach on a hedged basis provides investors with a portfolio that exhibits similar risk characteristics as dedicated US Fixed Income, however with the potential for increased diversification and return generation.
Investment Management Global Disclosure
As of July 17, 2015
BNY Mellon Investment Management is an investment management organization, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
This information is not investment advice, though may be deemed a financial promotion in non-U.S. jurisdictions. Accordingly, where used or distributed in any non-U.S. jurisdiction, the information provided is for Professional Clients only. This information is not for onward distribution to, or to be relied upon by Retail Clients.
For marketing purposes only. Any statements and opinions expressed are as at the date of publication, are subject to change as economic and market conditions dictate, and do not necessarily represent the views of BNY Mellon or any of its affiliates. The information has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. BNY Mellon and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. To the extent that these materials contain statements about future performance, such statements are forward looking and are subject to a number of risks and uncertainties. Information and opinions presented have been obtained or derived from sources which BNY Mellon believed to be reliable, but BNY Mellon makes no representation to its accuracy and completeness. BNY Mellon accepts no liability for loss arising from use of this material. If nothing is indicated to the contrary, all figures are unaudited.
Any indication of past performance is not a guide to future performance. The value of investments can fall as well as rise, so investors may get back less than originally invested.
Not for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. This information may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this information comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this information in their jurisdiction. The investment products and services mentioned here are not insured by the FDIC (or any other state or federal agency), are not deposits of or guaranteed by any bank, and may lose value.
This information should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorized by BNY Mellon Investment Management.
This information is approved for Global distribution and is issued in the following jurisdictions by the named local entities or divisions: Europe, Middle East, Africa and Latin America (excl. Switzerland, Brazil, Dubai): BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. • Switzerland: Issued by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorised and regulated by the FINMA. • Dubai, United Arab Emirates: Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services Authority. This material is intended for Professional Clients only and no other person should act upon it.• Singapore: BNY Mellon Investment Management Singapore Pte. Limited Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore. • Hong Kong: BNY Mellon Investment Management Hong Kong Limited . Regulated by the Hong Kong Securities and Futures Commission. • Japan: BNY Mellon Asset Management Japan Limited. BNY Mellon Asset Management Japan Limited is a Financial Instruments Business Operator with license no 406 (Kinsho) at the Commissioner of Kanto Local Finance Bureau and is a Member of the Investment Trusts Association, Japan and Japan Securities Investment Advisers Association. • Australia: BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865). Authorized and regulated by the Australian Securities & Investments Commission. • United States: BNY Mellon Investment Management. • Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. • Brazil: this document is issued by ARX Investimentos Ltda., Av. Borges de Medeiros, 633, 4th floor, Rio de Janeiro, RJ, Brazil, CEP 22430-041. Authorized and regulated by the Brazilian Securities and Exchange Commission (CVM).
The issuing entities above are BNY Mellon entities ultimately owned by The Bank of New York Mellon Corporation
BNY Mellon Investment Management EMEA Limited (“BNYMIM EMEA”) is the distributor of the capabilities of its investment managers in Europe, Middle East, Africa and Latin America. Investment managers are appointed by BNYMIM EMEA or affiliated fund operating companies to undertake portfolio management services in respect of the products and services provided by BNYMIM EMEA or the fund operating companies. These products and services are governed by bilateral contracts entered into by BNYMIM EMEA and its clients or by the Prospectus and associated documents related to the funds.
BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. • Investment advisory services in North America are provided through four different SEC-registered investment advisers using the brand Insight Investment: Cutwater Asset Management Corp, Cutwater Investor Services Corp, Pareto New York LLC and Pareto Investment Management Limited. The Insight Investment Group includes Insight Investment Management (Global) Limited, Pareto Investment Management Limited, Insight Investment Funds Management Limited, Cutwater Asset Management Corp and Cutwater Investor Services Corp. • BNY Mellon owns 90% of The Boston Company Asset Management, LLC and the remainder is owned by employees of the firm. • The Newton Group (“Newton”) is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S.• BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC). • This information does not constitute an offer to sell, or a solicitation of an offer to purchase, any of the firms’ services or funds to any U.S. investor, or where otherwise unlawful.