With the Federal Reserve slated to continue tackling interest rates, fixed income strategies remain an ever-important lynchpin in an investor’s portfolios.
Fixed income mutual funds and ETFs can help investors build on yield, put their cash to work, and diversify their assets. However, traders may not recognize several risks associated with fixed income strategies.
Mark J. Cintolo, CFA, CAIA, Vice President and Portfolio Consultant at Natixis Investment Managers Solutions, discussed positioning one’s fixed income strategies after the Federal Reserve cuts interest rates. In recent insights, Cintolo noted a few key factors that investors should make themselves aware of.
Move From Cash to Mitigate Reinvestment Risk
Investors have benefited from strong yields from cash investments, such as money market funds, for some time now. Cash strategies often offer the benefit of mitigated risk, with many traders seeing them as a means to put their money on the sideline to work.
However, returns from cash strategies will likely be lower as the Federal Reserve keeps trimming rates. Cintolo pointed out that moving assets out of cash investments may benefit investors before rates get too low.
“Having too high of a cash allocation at the start of a cutting cycle creates reinvestment risk,” Cintolo adds. “Staying in cash as rates are falling means missing an opportunity to lock in higher returns over multiple years.”
See More: Inflation Bites Into Cash Investments. Instead, Opt for Equities
Diversify Away From the Agg
Many investors use the Bloomberg US Aggregate Bond Index (Agg) to guide their fixed-income strategies. The Agg is a storied benchmark for measuring bond performance, helping investors better understand the success of their investments.
As Cintolo noted, investors who solely rely on the Agg may miss out on more diversified sectors in the fixed income market. He highlighted how investors should also be aware of the Agg’s increasing correlation with Treasury yields.
“A more robust fixed income sleeve with greater differentiation from the Agg can provide more opportunities for both return enhancement and risk mitigation,” Cintolo said. “If the goal is to maximize risk-adjusted returns, you want more levers in your portfolio that can be used for either return enhancement or risk mitigation.”
Cintolo highlighted sectors such as CLOs and high-yield bonds to broaden one’s investment outside the Agg. Additionally, investors can opt for a more defensive play by allocating assets toward floating-rate securities or Treasury Inflation-Protected Securities (TIPS).
Looking for Fixed Income Strategies? Natixis Can Help
Natixis Investment Managers offers many solutions for investors seeking to build a fixed income portfolio. Traders can visit the Natixis webpage to learn more about the available funds, such as the Loomis Sayles Core Plus Bond Fund (NERYX).
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