Growing Fixed Income Still Possible

Rising interest rates and the expectation for the Federal Reserve to begin tapering off its bond-buying stimulus program do not necessarily imply diminishing returns for fixed income securities.

So reported a panel of experts hosted by American Beacon Advisors in New York. The panel, comprised of a number of active portfolio managers, pointed mainly to high-yield bonds and dividend-paying stocks as promising investments historically during periods of rising interest rates.  

“Equities tend to outperform bonds during this type of period, and within the equity world, dividend-yielding stocks tend to be the best,” Mark DeVaul, a portfolio manager at The London Company of Virginia, said. “It’s a very positive time for investors to look at dividend-yielding strategies when they are worried about higher interest rates.”

This is because dividends over the last eight years have grown by more than 50%, DeVaul said, and that growth has served as a powerful hedge against inflation, portfolio volatility and falling bond prices. He expects that continuing pressures on companies to improve efficiency in the face of wider economic challenges will likely cause dividend growth to continue.  

Jack Flaherty, another panelist and investment director at GAM International Management, discussed the positive and negative aspects of adopting an unconstrained bond portfolio during periods of rising interest rates as a means of bucking the traditional performance of bonds during these periods.  

“Duration management is number one,” Flaherty said. “With short durations in a rising rate environment, you can make money. We also look at taking a relative value global approach as a pretty good opportunity.”

Flaherty also mentioned adding short-term convertible bonds as a part of an effective asset-allocation strategy during periods of rising interest rates.

Other panelists included Francis Scotland, director of Brandywine Global Investment Management; and Martin Smith, senior portfolio manager and partner at PENN Capital Management Company.