Against a backdrop of surging interest rates and bond yields, private bank fund selectors are increasingly searching for solutions that can provide their clients with sustainable sources of long-term income and bullet-proof portfolios in light of market volatility.

That quest has not been made easier by high interest rates on cash deposits, which has encouraged some clients to sit on the sidelines rather than move up the risk curve.

At Asian Private Banker‘s 10th Funds Selection Nexus 2023 Hong Kong, leading private bank fund selectors addressed how they are navigating these challenges during a keynote panel: The future of fixed income – How is enthusiasm for bonds changing long-term portfolio allocation?

Risk and reward skewed to the upside

Following its decision to hold interest rates last week, the US Federal Reserve sent a hawkish tone to markets – namely, that interest rates will stay higher for longer. The 10-year treasury yield subsequently jumped to more than 4.5%, its highest level in 16 years. Holding bonds at these levels is compelling, panellists said.

Jeffrey Tam, Julius Baer

“We can agree that the risk and reward of holding fixed income in your portfolio is becoming skewed to the upside,” said Jeffrey Tam, head of investment fund specialists, Hong Kong, Julius Baer.

Tam believes that government bonds look cheap relative to history, on an absolute and a relative basis. US government bonds are now also offering real yields that are comparable to long-term US growth rates.

“I think fixed income as an asset class offers stability in terms of economic uncertainty, and I believe fixed income should command a sizable allocation within clients’ portfolios for diversification. The historical low correlation between stocks and bonds can also be an anchor to portfolios, reducing drawdowns in times of equity market decline,” said Tam.

Sabina Chiang, Standard Chartered

Sabina Chiang, head, managed investments, wealth management, Hong Kong, Standard Chartered Bank, added that the current level of yield is a good buffer against any short-term interest rate hikes.

“If we take the US Treasury benchmark index, for example, it will take an additional 75 basis point hike in order for the price loss to outweigh the top line yield overall. So we do recommend clients who have a core fixed income investment portfolio to maintain and to lock in the yields and to provide certain security,” explained Chiang.

Active management makes sense

For Goldman Sachs Private Wealth Management (PWM), the US giant is expecting no further rate hikes this year, and for rate cuts to begin in the second quarter of next year.

Jacky Tang, Goldman Sachs

“Fixed income investment is all about the flexibility of adjusting your duration along the way. So active management makes a lot of sense in this particular environment,” asserted Jacky Tang.

Tang is the head of portfolio management group Asia, the head of portfolio advisory group Asia, and head of investment strategy group Asia, for Goldman Sachs PWM.

“The market consensus right now [is that] the interest rate path over the next 24 months will be lower. So therefore, a portfolio of intermediate to longer duration bonds could maintain the income generation ability, while also providing a generous total return on the holdings in your portfolio when yields start to fall,” Tam highlighted.

Zandrew Liu, Deutsche Bank Private Bank

On the other hand, Zandrew Liu, head of offering management, North Asia, Deutsche Bank Private Bank, believes that a range of durations may be the best way to build a well-diversified fixed income portfolio.

“It’s like picking lottery numbers, we can actually pick up all numbers. And our approach for a well-diversified portfolio is to have a piece in every category. It’s very hard to time the market, so when the market changes, you still have some participation,” Liu explained.

Size matters

Emerging markets (EM) may be seeing more interest this year, but fund selectors think it is important to be discerning.

“We actually recommend clients to have allocation in EM, both in equities and bonds,” Tang shared, but added that it is important to consider the size of the allocation.

Tang explained that he believes Goldman Sachs PWM may have the lowest EM allocation among the Wall Street banks. “Developed markets may provide you with better risk-adjusted return for the long term. So that’s why for EM we try to be more cautious and the allocation is slightly less.”

Chiang, however, noted that Standard Chartered is recommending EM fixed income to clients as some bonds are currently offering attractive yields. For example, the bank likes local currency debt, such as Indian sovereign bonds, which are yielding 7%.

“We think that many of the countries are coming now to the end of the rate cycle, so the central bank’s policies could be supportive which will be beneficial for the EM bonds. Also, we are seeing a weakening of the dollar which will be beneficial to the asset classes.”