Comment and opinion for retail investors in the UK
I am pausing my mini-series of posts on selecting bond funds for specific objectives to write about some high level issues, because what has been happening in the fixed income markets recently has been so remarkable that it is being described as a ‘first’ by specialist managers with over 30 years experience.
I will pose and answer some questions but would welcome others from readers with a view to publishing the answers in another post. Please use the comments option or email me if you prefer.
My slightly later than usual start to writing this piece has followed a brief recovery spurt in global equity markets, indicating that if there is even the merest hint of a slow down and reversal of the hawkish attitude of the US Federal Reserve, markets are poised and waiting to inflect to a positive or even bull run after a gloomy period now running to almost a year.
The ending of the 12 months since the current bear market got under way will see all the short term data look a bit different because of what is called ‘base effects’. Let me explain.
This post is early because I am away for a few days birdwatching the mass migrations on the edge of the Baltic Sea for the rest of this week. My monthly briefing will conversely be late, but given the political events in the UK, waiting a few days to see what further fallout there is from the special fiscal operation may be wise anyway.
In the post called ‘Getting your Fix, part two’, I proposed 3 possible motives for considering fixed income investments now the market has inflected and all the factors I outlined in part one, plus the recent Chancellor’s proposals in the UK, are in play. This week, I want to see how you would approach research into the market if your objective was the first one I suggested: earning a return on money that would otherwise be in cash.
I started this series of educational posts by outlining current factors that make fixed income assets a very different proposition to what they were a year or so ago. Since I did that, some factors have been amplified.
The UK markets had been waiting to see what a new leader would do to help people with energy bills and was nervous about the likely impact on the public finances but almost everyone was astonished (even those who approve of the return to Reagonomics) by the special fiscal operation (or Watership Down as some have called it) announced at the end of last week. The impact on fixed income markets has been instant and dramatic with yields rising to levels not since before 2008.
Since I started writing this, the Bank of England has announced that it is reversing its plan to start quantative tightening and going back to money printing. I assume this means that that want to clamp down on inflation by printing money – a novel new economic theory, not exactly as imagined by Milton Friedman and associates!
A decline in the value of Sterling may still turn into a currency crisis and such crises tend to run out of control until they hit the buffers. All this is happening as I write so I have no intention of offering guidance on what to buy and when, or even to say if the fixed income asset class is yet attractively priced (it certainly will be before too long, I guess).
What this week’s post will do is explain how the fixed income market is divided up for access by retail investors. This information can then be matched up with your objective to see what funds universe might meet your needs.
(published early!)
Last week, I outlined the main factors that might be relevant to a decision to add some fixed income funds to an asset mix in the current financial and economic climate.
Having a general idea that bonds (the general word for fixed income assets) are once again an interesting asset class is one thing, but that is not enough of a reason to rush out and buy a mix of bond funds.
Having offered a succint(ish) refresher on the basics of fixed income investing in the Digging Deeper section of my Monthly Briefing, I have had some feedback from subscribers that some further guidance on researching fixed income funds, and the logical basis for any decision making, might be welcome.
This is a big subject and one where I have not offered much training even to those taking my intensive training programme, simply because over the last couple of years, it gradually became obvious that there was an increasing risk (now demonstrated) in owning any fixed income assets for the majority of investors, so no point in spending a lot of time trying to grasp the complexities of an asset class that you could safely ignore!
In essence the textbook case for owning bonds to lower risk had been undermined and it was clear that fixed income assets would not offer much protection when the bull market cycle ended.
As we are now well past the end of the bull market and what was anticipated has come to pass, now is the time to get up to speed on this most technical of the major asset blocks.