With stocks hitting record highs, many investors want to mitigate the largest source of risk in their portfolios – equities. In recent decades, fixed income has served this purpose well. The asset class has generally delivered both positive returns and negative correlations with equities.
Economic dislocations, regulatory shifts or intense competition can change the market dynamics confronting big, and at times unwieldy, conglomerates. They often force corporate restructurings that can result in more effective capital allocation and returns for investors who recognize promising new strategies amid the prevailing market pressures.
“Smart Beta” ETFs and their low-volatility ETF progeny may deliver a lower beta against their relevant benchmarks, but they’re not immune to bouts of volatility, and their returns frequently come up short.
As the Fed raises rates and suggests it may start shrinking its balance sheet later this year, managing duration risk becomes much less straight forward.