Unconstrained by an index, investors can allocate globally and across different segments of the fixed income universe, and therefore gain exposure to markets with less credit risk. There will be countries that are at a different phase of their economic cycle and where inflation is declining, leading to interest rate cuts.
Investors should also take the opportunity to invest in the different instruments of a company’s capital structure. For example, in some sectors of the corporate bond market that are still vulnerable to the deleveraging process, such as banks, there may be opportunities to buy senior paper (with better default protection and a higher potential pay out), possibly with a floating rate coupon.
These simple measures, together with derivative hedging, can help an investor retain the potential to achieve a return higher than inflation in a near zero-interest rate environment, while avoiding some of the fall-out when interest rates look set to rise.
Paul Brain is investment leader of fixed income at Newton Investment Management
