Ahmed Farooq, Vice President, ETF Business Development, Franklin Templeton Investments, sat down with us at the CETFA Mindpath ETF 2018 Conference to talk about the various ways advisors (and investors) can deal with the problem of fixed income investing in the rising rates environment.
In this environment of rising rates a couple of problems have arisen in investors' fixed income portfolios; bonds that were trading at a premium valuation, and nearing maturity compressed to par value, and rising yields are having a negative impact on bond prices, leading to negative performance in bond portfolios. So, bond investors are not only unhappy with their performance, they are now also faced with the conundrum of what to do with their fixed income in the face of rising interest rates.
Slice-and-dice it yourself, that is, navigate the complexity of the bond market, or adopt solution-based fixed income mandates from companies that have been in the industry, specifically on the fixed income side, for many years?
Whether you're buying short- or medium-term duration bond ETFs, what you're essentially trying to do is manage that [problem] yourself.
"If you're a traditional bond buyer, a lack of inventory or lack of liquidity on the bond desk means its tougher to do as well. A simple bond ladder that use to take care of everything is no longer the case, because you can't rebalance it. Now, you have to wait until the bonds mature, and then you restart the ladder again," says Farooq. "What we we're seeing is that the growth rate in active fixed income is now 49%, and more solution based products are coming out where they're taking all the individual ingredients and building a solution based on what you want."
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