Content provided by Paula Wieck, CLS Portfolio Manager
How many people have you talked to lately that still feel weary of bonds? Many of us on the portfolio management and investment research teams have found that the number one concern among investors is why we are still investing in bonds. We’ve written a decent amount of commentary about this in the past, but here’s a bulleted list for your reference as to why bonds still make sense in a portfolio and why CLS is not abandoning this asset class:
- Diversification Benefits:
- The goal for diversification is not to boost performance, but to help set the appropriate level of risk for our clients – bonds help us do this.
- While diversification may not maximize gains in rising markets, it can certainly help limit losses when the market is turning down.
- The less correlated the assets are in your portfolio, the more efficient the trade-off between risk and return.
- Different Bonds Will Have Different Opportunities:
- Shorter duration bond products may outperform longer duration funds in spite of lower current income (CLS portfolios have shorter bond duration than its benchmarks).
- Longer duration, higher quality bond funds may have greater price declines than other bond funds if interest rates rise, but they may perform well in response to challenging economic conditions when stocks suffer (CLS has been improving the credit quality of its fixed income portfolios and will continue to do so).
- For example, high yield bonds will likely perform better than longer duration government bonds if interest rates rise, but longer duration government bonds will likely perform better if stock markets fall (CLS has a well-diversified fixed income mix within its portfolios).
- Bear Case for Bonds Still Far Better than Bear Case for Stocks:
- As our third quarter Market Review pointed out, though there may be a bear case emerging for bonds, historically, the probability for bonds generating negative returns is much lower than the probability of stocks generating negative returns.
Bottom Line: Bonds add a diversification benefit which aids in controlling risk; different bonds are used to hedge different types of risk; and the bear case for bonds isn’t nearly as bad as it would be for stocks. Bonds still make a lot of sense!