According to MFS’s latest Global Fixed Income Sentiment survey, significantly more German financial advisers rely on active rather than passive bond management. Almost half of the surveyed consultants assume that actively managed bond investments meet their earnings expectations. Only 29% expect this from passive investments.
47% believe that working with active bond managers is the best way to maximise return regardless of the market environment, and 48% believe that active bond strategies are also the best way to achieve fixed income long-term goals.
“In the case of fixed-income investments, success depends above all on market dynamics. Because interest rates in Europe and around the world have been very low for a very long time, financial advisers may be tempted to put less emphasis on active management,” said Matthew Weisser, managing director Europe at MFS Investment Management.
“But with interest rates rising, the business cycle getting older, and volatility increasing, it makes sense to allocate investors to active bond strategies. After stocks have performed well for ten years, they now want more risk management again.”
Active bond strategies are in high demand
Although German financial advisors are optimistic for the economic situation in their country and worldwide, they are becoming cautious. They fear political instability, volatile stocks and rising interest rates. Therefore, they are increasingly interested in bonds – to diversify their portfolios (75% of respondents) and to reduce volatility (68%).
However, these two goals put a financial dilemma in the hands of financial advisors: Nearly 60% of respondents said they had taken higher risks over the past three years to achieve their desired returns with bonds.
50% of German financial advisors plan to increase their exposure to emerging market assets – which are considered to be above-risky – to more than their exposure to any other fixed income asset class over the next three years. Therefore, risk management is particularly important when selecting investment products and portfolio managers.
Keep an eye on risk metrics
When selecting fixed-income investments and their managers, financial advisers are primarily concerned with risk management. They prefer risk-aware approaches. Almost 70% stated that they value risk-adjusted performance over the long term.
However, consultants may not consider all risk measures equally when assessing the quality of risk management. German financial advisers said they would pay particular attention to the following: performance stability (67%), relative performance versus a benchmark (62%) and absolute performance / total return (42%). Absolute Risk (28%), Relative Risk / Tracking Error / Beta (21%) and Portfolio Turnover (10%) were less advisors considered important.
Active control of duration and risk is particularly important
Financial advisers are aware that active management can be beneficial to their clients’ portfolios, especially in the bond area. According to the survey, consultants for active managers are particularly interested in managing duration (79%) and risk (73%).
“We are convinced that an active bond approach can create added value for investors. There are first signs of a possible end to the current cycle. Investors will therefore want to shift more of their portfolios into fixed income. A closer understanding of current bond risks and their causes is therefore a must for every financial advisor and their clients,” said Weisser.