The fixed income debate is well underway and both pro and con have stated their opinions on whether or not investors benefited from including bonds or bond strategies in their portfolios in 2009.
Here’s some coverage from the pro viewpoint written by David Bezic, Assistant Portfolio Manager, Investment Strategy and Economics with Ontario Teachers’ Pension Plan:
“I have been asked to take the pro side of this debate and let me start by saying with the benefit of hindsight, it is now apparent that including bonds in a portfolio over 2009 was not nearly as lucrative as constructing a portfolio composed entirely of equities. This should not come as much of a surprise, given that we are talking about a year in which the S&P/TSX Composite total return index delivered its strongest performance in three decades.
However, when one expands their window of hindsight to include the turmoil of 2008, the value of fixed income, both in terms of its inherent stability and its role as a diversifier in a portfolio, becomes clear. This observation is especially important for plan sponsors and other investors with an investment horizon stretching beyond just a single year. Furthermore, as we begin to gauge the potential enduring impacts of the Great Recession, we are reminded of the diversifying and stand-alone benefits that fixed income can continue to provide as part of a balanced portfolio.
When assessing the role played by fixed income investments through 2009, it is important to recall the tremendous amount of uncertainty that clouded the economic and financial market outlook heading into the year. The sharp retrenchment in risky asset markets and private sector deleveraging triggered a deflationary shock to the wider economy. Although the policy response was equally forceful, it lacked historical precedent and its potential for near-term success was far from assured, while its ultimate impact longer-term remains to be seen. With parallels to Japan’s lost decade weighing on the minds of investors, the risk of deflation could not be easily dismissed. And in a deflationary environment, nominal fixed income—with its promised return of principal—stands out as a safe harbour. So yes, on a relative basis, fixed income did indeed lag the performance of equities. However, in a risk-adjusted world, plan sponsors and investors with fixed income allocations reaped the benefits and peace of mind provided by an effective hedge against uncertainty.”
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