2014 is a good time for them to rethink their strategy, if they haven't already done so in 2013. I think a lot of investors learned valuable lessons from the big selloff. In 2012 and 2011, in the low-yield environment, we saw many investors really move out of their comfort zone in terms of risk. They either took on additional duration risk or additional credit risk. And you can see what the impact has in a big selloff on investor portfolios. We saw that last summer. So I think this is the time to rethink that.
Where we are in the interest-rate cycle is very important. It's unlikely rates will go down dramatically, unless we really go into a global slowdown or a big U.S slowdown in the economy, which isn't necessarily ours or most people's view. At the same time, we do think rates will stay low for longer. We're not looking for a dramatic backup. But you need to be very tactical, where on the curve you need to be positioned, how you want to take risk. So, for instance, we're advocating a 20-year position. But we want to hedge back some of that position, as well, to get to a more overall duration-neutral position.
Now, the other aspect is high yield. A year ago we were advocating paring back high yield. Credit spreads were tight. We were worried about liquidity. Now, a year later, since credit spreads have widened and there's more value in that part of the market, and we want more income, we're advocating a more neutral position to high yield. We are being a little bit cautious there.
Related by Topic: Economic Outlook , Fixed Income
Despite the market swings last week, volatility is still very low, suggesting investors are not taking into account the prospect for bad news. Chief Investment Strategist Russ Koesterich discusses why that means investors should favor asset classes that can provide some cushion.