Canadian investors seeking higher yields in the current low-rate environment should add more global bonds to their fixed income portfolios, according to portfolio managers with Franklin Templeton Investments Corp.
As part of a national roadshow, portfolio managers spoke to financial advisors in Toronto this week about fixed income investing opportunities. They said investors should diversify their fixed income holdings as much as possible, both in terms of regions and types of securities.
“It’s times like these where we really feel that taking a diversified approach is incredibly important,” said Stephen Lingard, senior vice president and director of research at Franklin Templeton’s multi-asset strategies unit, and co-lead manager of the Quotential Program. “Diversified exposure, as well as a tactical ability to tilt to different sectors, makes a lot of sense.”
With interest rates extremely low in Canada and the United States, most bonds in these highly correlated countries are yielding just 2% to 3% at best, noted Brian Henry, vice president and institutional portfolio manager in Franklin Templeton’s fixed income group. In contrast, many other countries around the world boast higher interest rates and much more attractive yields.
“We really think we can find better opportunities elsewhere,” Henry said. He pointed to countries such as Egypt, Australia and Brazil, where fixed income securities are yielding as much as 11%.
“By picking and choosing the best opportunities, we think we can create a portfolio that’s got a pretty healthy amount of yield with a relatively low amount of risk,” he said.
Asia is another region with compelling opportunities for fixed income investors, according to Henry. He’s particularly bullish on South Korea, Malaysia and Indonesia. Within Europe, he considers the most attractive areas to be Poland, Sweden and Norway.
Tapping into these international fixed income markets can also provide investors with access to different types of fixed income securities, some of which aren’t available in the Canadian market.
For example, Canada has very little to offer in terms of high yield bonds and floating rate notes, according to Lingard. He said these types of securities, along with emerging market sovereign debt, are likely to outperform traditional bonds once interest rates begin rising.
“Longer term, we do have a view that rates will go higher, and diversified income does give us exposure to some of these things that will protect better,” Lingard said. “If rates go up 300 or 400 basis points, a lot of these sectors could get hurt, but not as bad as governments.”
But Canadian investors generally tend to invest the bulk of their fixed income portfolio in Canadians bonds, and therefore aren’t well positioned for the possibility of higher rates.
“I would argue that investors are certainly underexposed to a lot of these areas that will help protect in a rising interest rate environment,” Lingard said.
While Canadian bonds can be effective as the core component of a fixed income portfolio, he urges advisors to help clients diversify their holdings for protection.
Global bonds one solution for low interest rates, say Franklin Templeton managers
Fixed income securities in Egypt, Australia and Brazil are yielding as much as 11%
- By: Megan Harman
- October 24, 2010 October 24, 2010
- 09:55