How Actively Managed Fixed Income Can Meet the Needs of Retirees
We have been in a period where financial market volatility has been abnormally low and as such, the focus in fixed income has become overly skewed to how much interest income can be generated, at the expense of ignoring downside risks. For this reason, the price component of bond returns hasn’t received much attention. As we are now shifting to a higher interest rate and credit spread volatility regime, price movements become more important as they can be a far larger driver of total returns than interest income.
This is especially relevant for retirees seeking stable income generating portfolios.
Additionally, what we see in Australia is that some of the most popular income sources – equities for dividends (particularly bank stocks), bank hybrid bonds, investment properties – are closely linked to each other and can therefore become highly correlated in a downside scenario. This means they can all end up incurring losses at the same time. So, when thinking about income sources, it’s important to consider how they will behave in different scenarios. To think about how much and what types of risks you’re taking to get that income and to consider how those risks will interact with other parts of your investment portfolio.
None of the various income options available is inherently better or worse. Rather, the focus should be on diversifying income sources to achieve a balance of risks that can navigate a range of possible scenarios - whilst still providing a stable income.