Role of corporate bonds in a portfolio
Hello advisers,
What role do you see for corporate bonds in a 60/40 portfolio? Do you see it increasing, decreasing or no change and why do you say this?
Thanks
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The role of bonds in a portfolio is to provide 1)a guaranteed yield and hence some certainty of long-term returns 2) a hedge in periods of intense market stress as they tend to be negatively correlated to equities and 3) a source of some stability (although this past year has put this to the test) in case clients need to sell down a portion of their portfolio for spending purposes. Highly rated government bonds serve this purpose. Corporate bonds unfortunately do not as they come with extra risks attach such as spread widening or default risk. We tend therefore to avoid them where possible and prefer to use equities as the primary risky growth drivers in our porfolios.
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This supposes there's a place for 60/40 portfolios. Which there isn't. But if you have to go near fixed income, avoid corporate bonds. The only point of fixed income was to dampen volatility. It serves no other purpose.
Even that ruse has been exposed in the last 12 months, with quality bonds taking a hammering. So much for dampening.
The least volatile short-term fixed income is Government debt. This should be the bond element. Corporate bonds are too volatile and high-yielding ones are virtually equity-like in price movements.
Even that ruse has been exposed in the last 12 months, with quality bonds taking a hammering. So much for dampening.
The least volatile short-term fixed income is Government debt. This should be the bond element. Corporate bonds are too volatile and high-yielding ones are virtually equity-like in price movements.