FIXED INCOME INVESTING

Rethinking fixed income in portfolios has come with new challenges for investors

Image of birds flying to new heights
Image of birds flying to new heights

A NEW ERA OF FIXED INCOME INVESTING

Fixed income investors are facing new market realities, as the global economy is moving away from a period of steady growth, stable inflation and supportive central banks. Instead, we are braving a new regime of heightened macro volatility, sticky inflation and tighter monetary policies marking the end of an era of extensive monetary easing. Furthermore, we are seeing an increased adoption of sustainable fixed income strategies1 as investors are increasingly rethinking their portfolio to transition to a low-carbon economy.

1Source: GBI as of 31 December 2022. Sustainable fixed income ETFs have grown almost 9 times higher since 2015 (from $7.8 billion to $70.4 billion) 

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

TODAY’S NEW MARKET REGIME COMES WITH CHALLENGES FOR INVESTORS

Navigating today’s new market regime requires a more granular and nimble approach to fixed income, with more frequent asset allocation changes. We recognise the need for investors to incorporate new implementation ideas, and we believe investors could make fixed income work harder in their portfolios through indexing. 

3 CHALLENGES & HOW iSHARES CAN HELP

iShares is the investment partner that can help evolve your fixed income portfolio through indexing.

CHALLENGE: PORTFOLIO CONSTRUCTION

The current investment landscape is presenting new opportunities for fixed income investors, what will be the role of bond ETFs in multi asset portfolios?

Over the last decade, investors have put their portfolio at risk by over allocating to equities and migrated to lower-quality debt in search of yield. But with central banks raising interest rates recently, we have seen a rapid change in fixed income yields – Particularly in high quality bonds, such as government bonds, short duration and IG credit.

Yields are back! 

Today, we see opportunities for investors to meet their return objectives while taking less risk. In fact, this ‘great reset’ of yields is resulting in far greater portfolio flexibility and could lead to better risk adjusted outcomes, in our view. In this context, Investors are recognising that fixed income ETFs may provide efficient ways to access different sources of return and manage risk.

For the first time since 2007, more than 80% of fixed income markets are yielding over 4%

A chart to show fixed income markets' yield

Source: BlackRock Investment Institute, with data from Bloomberg, 31 December 2022. Notes: The bars show market capitalisation weights of assets with an average annual yield over 4% in a select universe that represents about 70% of the Bloomberg Multiverse Bond Index, a broad gauge of fixed income securities. Emerging markets combine external and local currency debt. Euro government bonds is based on the French, German, Italian, Spanish and Ireland government bond indexes. Emerging Markets combines the external and local currency debt. Global Credit represented by the Barclays Global Aggregate Corporate index. Global High Yield represented by the Barclays Global High Yield index. ​US Agencies represented by Barclays US Aggregate Agencies index. Mortgage back securities represented by the Barclays Investment Grade CMBS index, the Barclays US Mortgage-Backed Securities index. US Municipal represented by Barclay Municipal Bond index. US Treasury represented by the Barclays US Treasury index.

How iShares can help

Investors need to take a holistic view when building portfolios and make fixed income work harder by utilising indexing. iShares fixed income indexing provides an efficient, liquid and transparent way to access different sources of return and manage risk in your portfolio.

We also believe the ‘active versus passive’ dichotomy is a long-outdated construct. Many investors now adopt a blended approach across asset classes to help improve portfolio outcomes over time.

When you invest with iShares, you get access to the broader added value, experience and expertise of BlackRock to help shape your whole portfolio.

A PARTNER IN CUSTOMISED PORTFOLIO CONSTRUCTION

EVALUATE

Your existing fixed income allocation to help you understand what drives risk and return in your portfolio with precision. Explore the impact of the inclusion of iShares fixed income ETFs in your portfolio through a BlackRock Portfolio Analysis and Solutions (BPAS) shock-test, which analyses changes to portfolio efficiency, liquidity and risk-return profile.

EVOLVE

Your portfolio by identifying areas to enhance overall efficiency or by incorporating new, accelerating trends such as sustainable fixed income and exploring opportunities in specific pockets of the fixed income market such as IG credit, emerging market debt or short duration bonds.

BUILD

More efficient portfolios and construct a strategic fixed income asset allocation with flexibility, so you can be nimble, even in the face of extreme market volatility. Use all the tools in the toolbox, spanning index and alpha-seeking strategies, to introduce flexibility when moving from strategic portfolio construction to a holistic implementation approach.

CHALLENGE: PRODUCT SELECTION

How can I get more granular in my fixed income allocation without sacrificing liquidity or diversification?

In uncertain times, investors face increasing pressure to deliver returns and maintain diversification while ensuring liquidity. They need to employ different tools (including ETFs and index funds) and implementation ideas to those traditionally used and take a more granular approach by focusing on different markets, new countries and credit quality views, as well as specific duration exposures.

How iShares can help

Using iShares fixed income indexing as efficient building blocks to implement a more granular approach allowing investors to maintain diversification and liquidity in their portfolio.

The largest and broadest fixed income range

iShares gives you choice, with the broadest range of Europe-domiciled fixed income UCITS ETFs and index funds, with over +100 funds2 offering access to almost all parts of the fixed income markets across countries, sectors, credit rating and duration.

These funds are managed by a team of over 70 fixed income portfolio managers who have global reach and local expertise in markets. Our portfolio managers efficiently minimise transaction costs by sampling the benchmark index while matching risk characteristics.3

+100

Europe-domiciled fixed income UCITS ETFs

+70

Fixed income portfolio managers with global reach and local expertise in markets

2 Source: Bloomberg, BlackRock Global Business Intelligence, as at 31/03/2023

3 Source: ‘Index Fixed Income Capabilities’, BlackRock as of 30/06/2021

Access to quality products

Investors need quality products, built to evolve with changing fixed income markets and regulation. When you invest with iShares, you get access to expertise, rigour and high standards along with the broader added value and experience of BlackRock.

Image of keys

CHALLENGE: EXPLORING SUSTAINABLE INVESTING

How could I shift my fixed income allocation to include sustainable considerations and measure the effect on my portfolio? 

BlackRock’s approach to sustainability is rooted in our fiduciary duty to clients. We provide choice to our clients, we seek the best risk-adjusted returns, and we underpin our work with research, data, and analytics. As a fiduciary, we manage material risks and opportunities that could impact our clients’ portfolios, including those related to sustainability.

Why indexing for sustainable fixed income?

Sustainable fixed income ETFs offer a transparent, rules-based approach to sustainable investing. Additionally, they usually incorporate business involvement screens, while targeting specific environmental, social, and governance (ESG)  objectives through minimum ESG ratings and controversy scores.

How iShares can help

Investors who plan to include sustainability considerations in their portfolio may need a partner to help them rethink their fixed income allocations. Backed by BlackRock, iShares fixed income indexing, can help investors navigate this change.

Choice

iShares offers one of the widest ranges of sustainable fixed income index funds in Europe, spanning credit, government bonds and emerging market debt.

Image of person carrying oranges

Visibility and transparency

Our iShares range track sustainable fixed income indices that are built with an objective, rules-based approach, giving investors clear visibility into the sustainable considerations used for bond inclusion from independent specialist data providers.

The sustainable characteristics and other datapoints on our product webpages, combined with rules-based index methodologies, further contribute to enabling transparency for investors.

Risk: The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

Risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

Image of someone painting

THE GREAT YIELD RESET

Mutiple | 31 May 2023

Learn more about bond ETFs and the generational opportunity in fixed income.

of articles