For clients whose risk tolerance requires an allocation to fixed Income, RiverFront’s portfolios are positioned for rising rates through three key portfolio strategies. First, our portfolios are strategically underweight bonds and overweight equities. Within our bond portfolios, we have a shorter maturity structure and higher weighting in floating rate bonds than the broad fixed income market. Finally, we have risk management and tactical processes designed to further derisk our fixed income portfolios should market conditions signal further downside risks.
Conclusion
The end of the long bull market in bonds has been forecast many times over the past decade, and we have made our share of premature calls for rising rates. We believe that bond investors have been repeatedly bailed out over the past decade as one central bank after another initiated large scale QE programs. We expect the last two central banks still implementing QE programs, the European Central Bank and the Bank of Japan, to suspend new bond purchases by the end of 2018. That means that the global bond market could lose two huge buyers just as the US Treasury needs to find buyers for nearly $2 trillion in debt. This dramatic swing in bond market supply and demand is occurring as US short rates are rising and global growth accelerating. We believe that these forces will inexorably drive rates higher overtime. Investors who have grown complacent after 35 years of falling interest rates could be surprised at the risk they discover in their supposedly safe bond portfolios, in our view.
This article was written by Michael Jones, CFA, Chairman and Chief Investment Officer at RiverFront Investment Group, a participant in the ETF Strategist Channel.
Important Disclosures
Information or data shown or used in this material was received from sources believed to be reliable, but accuracy is not guaranteed.
Strategic allocations may vary from portfolio composition or actual portfolio allocation throughout the year, depending on RiverFront’s investment decisions.
Past results are no guarantee of future results and no representation is made that a client will or is likely to achieve positive returns, avoid losses, or experience returns similar to those shown or experienced in the past.
RiverFront Investment Group, LLC, is an investment adviser registered with the Securities Exchange Commission under the Investment Advisers Act of 1940. The company manages a variety of portfolios utilizing stocks, bonds, and exchange-traded funds (ETFs). RiverFront also serves as sub-advisor to a series of mutual funds and ETFs. Opinions expressed are current as of the date shown and are subject to change. They are not intended as investment recommendations.
RiverFront is owned primarily by its employees through RiverFront Investment Holding Group, LLC, the holding company for RiverFront. Baird Financial Corporation (BFC) is a minority owner of RiverFront Investment Holding Group, LLC and therefore an indirect owner of RiverFront. BFC is the parent company of Robert W. Baird & Co. Incorporated (“Baird”), a registered broker/dealer and investment adviser.
These materials include general information and have not been tailored for any specific recipient or recipients. Accordingly, these materials are not intended to cause RiverFront Investment Group, LLC or an affiliate to become a fiduciary within the meaning of Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974, as amended or Section 4975(e)(3)(B) of the Internal Revenue Code of 1986, as amended.
Principal Risks:
Stocks represent partial ownership of a corporation. If the corporation does well, its value increases, and investors share in the appreciation. However, if it goes bankrupt, or performs poorly, investors can lose their entire initial investment (i.e., the stock price can go to zero). Bonds represent a loan made by an investor to a corporation or government. As such, the investor gets a guaranteed interest rate for a specific period of time and expects to get their original investment back at the end of that time period, along with the interest earned. Investment risk is repayment of the principal (amount invested). In the event of a bankruptcy or other corporate disruption, bonds are senior to stocks. Investors should be aware of these differences prior to investing.
Technical analysis is based on the study of historical price movements and past trend patterns. There are no assurances that movements or trends can or will be duplicated in the future.
Strategies seeking higher returns generally have a greater allocation to equities. These strategies also carry higher risks and are subject to a greater degree of market volatility. Diversification does not ensure a profit or protect against a loss.
Dividends are not guaranteed and are subject to change or elimination.
Investing in foreign companies poses additional risks since political and economic events unique to a country or region may affect those markets and their issuers. In addition to such general international risks, the portfolio may also be exposed to currency fluctuation risks and emerging markets risks as described further below.
Changes in the value of foreign currencies compared to the U.S. dollar may affect (positively or negatively) the value of the portfolio’s investments. Such currency movements may occur separately from, and/or in response to, events that do not otherwise affect the value of the security in the issuer’s home country. Also, the value of the portfolio may be influenced by currency exchange control regulations. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the portfolio.
Foreign investments, especially investments in emerging markets, can be riskier and more volatile than investments in the U.S. and are considered speculative and subject to heightened risks in addition to the general risks of investing in non-U.S. securities. Also, inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
In a rising interest rate environment, the value of fixed-income securities generally declines.
High-yield securities (including junk bonds) are subject to greater risk of loss of principal and interest, including default risk, than higher rated securities.
Index Definitions:
Standard & Poor’s 500 Index (S&P 500) measures the performance of 500 large cap stocks, which together represent about 80% of the total US equities market.
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