Insight Investment senior portfolio manager, Damien Hill outlines why he believes a strategic bond strategy could be the right fixed income tool when it comes to tackling the job of retirement investing.
Clients often talk about choosing the right fixed income tool for the job in retirement investing. Investing in retirement typically requires a different approach than it did when clients were earning – most significantly, clients are more likely to be focused on income creation than on generating wealth for the future. By using the right tools for the job, fixed income can help clients achieve this in retirement planning.
In our view, a strategic bond approach can give retirement clients access to their goals of income generation, capital preservation and growth all in one place; offering a solution for investors seeking the safety of fixed income, while aiming for higher returns than a typical static fixed income allocation (such as cash, government bonds and credit).
Typically, when thinking of the assets used in a strategic bond strategy, one might think about allocation across government and corporate bonds, with a limited use of derivatives, predominantly for hedging risk. A typical strategic bond approach applies no benchmark constraints and will not have rigid allocations, allowing for greater flexibility in accessing asset classes.
If we think about the sources of potential returns targeted by such approaches, they will generally look to generate returns from up or down movements in yields and credit spreads, alongside relative-value positioning between sectors and asset classes. Whether it’s government or corporate bonds, financial or non-financial debt, when picking the right bonds, the real assessment is whether one issuer will outperform another.
In our view, there is a strong advantage to a strategic bond approach over alternatives – such as advisers choosing individual bonds themselves with different pockets of assets. With a strategic approach, a client’s investments are all in one place, allowing for efficient transformation of the allocation and the risk profiles in a holistic and more timely fashion.
Lessons from 2022
Fixed income is often viewed as a lower-risk asset class. Of course, there are clients – including those planning for retirement – who will focus on more growth-orientated strategies and therefore have riskier bonds; and others who want more capital protection and are therefore looking at lower-risk strategies.
However, the turmoil in the UK government bond market in September 2022 showed that fixed income can be a challenging asset class. Many retired clients will have had assets in fixed income, and some of them will have seen negative returns because of the volatility. It has become evident that there were managers either with very long duration bonds, meaning they were more sensitive to interest rates, or managers with riskier bond allocations in the high yield space. Earlier in 2022, credit spreads widened, and bond yields rose aggressively as a result of the significant supply-chain disruption and inflationary impulses emanating from the Russia/Ukraine conflict. In response, central banks aggressively hiked rates and risk markets suffered, which led to negative returns across fixed income markets.
There are lessons to be learned here. For advisers with a client invested in a growth-oriented strategy, considerations need to be made to assess the risks that are actually being run and any underlying risk. A number of managers with long-duration bonds, which fell very sharply during the late 2022 volatility, were not quick to change asset allocation and shift duration shorter. This suggested that perhaps the potential and underlying risks were not fully assessed in advance.
Protection, income and return?
Against unexpected market swings or a weak fixed income market backdrop, strategic bond strategies can offer the potential for strong capital protection and the ability to shift asset allocations efficiently. By taking a global approach to strategic bond investment, there is no necessary home bias which allows for two options: to seek the best opportunities around the world, but also the ability to pick up opportunities domestically when they appear.
To balance return efficiency with diversification, it is vital to avoid concentrating bets in any one area and to dynamically allocate across asset classes, rather than having a static asset allocation.
Bond yields have come off the historical lows seen after the financial crisis and peaked in the last few years. We expect those high yields to be here in the medium term – based on our expectations of volatile geopolitics, inflationary tailwinds and government borrowing remaining elevated.
As a strategic bond investor, I am not forecasting over the next few years any material recession in developed markets, and we expect a ‘soft landing’ for economic growth. From this perspective, the number of interest rate cuts priced into most developed markets is too many and too fast, in our view.
In that environment, the attractive income and potential return generation offered by fixed income markets should be competitive, and probably better than equities on a risk-adjusted basis, in our view.
This article first appeared in Money Marketing, a monthly magazine and website for financial intermediaries in the UK.
2621500 Exp: 27 February 2026
