In its Red Paper: Eyes wide open for the age of absolute return investing report, QIC said investors should start employing flexible strategies to “mine new sources of return” instead of holding onto traditional fixed-income strategies.
QIC managing director of global liquid strategies Susan Buckley said investors who continue to hold traditional fixed-income positions risk capital losses as global interest rates are “poised to go higher” over the next two years.
“Unlike traditional, benchmark-constrained approaches, an unconstrained strategy can invest across the full spectrum of sector, quality, maturity and geography,” Ms Buckley said.
“It can continually evaluate and access the widest possible set of opportunities in the fixed-interest universe, with no built-in bias toward any particular sub-sector,” she said.
Ms Buckley also said the current cycle of strong fixed-interest returns derives from the unusually low interest rates and quantitative easing measures that the central banks have in place, but highlighted that it will change as they start to change monetary policy.
“As a number of key central banks edge towards an about-face, monetary policy will transition to become the predominant force for higher volatility,” Ms Buckley said.
“It makes us think that it will be near impossible for fixed-income portfolios shackled to benchmarks to deliver returns like those of the past,” she said.
“This stems from the fact that traditional fixed-income portfolios generally contain too much interest rate risk. Interest rate risk may be a great thing in a low-to-steady interest rate world but potentially damaging in a rising rate climate,” Ms Buckley said.
