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Why absolute return bonds?
There are several challenges facing fixed income investors. Over the last 30 years, a bull market in bonds has led to consistently lower yields and good returns for investors. We are now at the point where it is harder for yields to fall further - indeed with governments around the world pumping money into the financial system, we may now be entering a sustained period of rising yields and significantly poorer returns for bond investors.
Additionally, even investors in corporate bonds are often exposed to unintentional risk. For example, within credit indices issuers with the highest debt burden have the heaviest weightings. So for traditional credit mandates benchmarked against these indices, this often means that there will be exposure to these issuers even if the manager holds a negative view as to not hold these names would be a big 'risk' versus the index.
In the current environment, fixed income investors are looking to reduce investment risks without sacrificing the return benefits they have become accustomed to through fixed income. An allocation to an absolute return bond fund is a credible way to accomplish this. These funds seek to provide positive performance in all market conditions. Investing in a diverse range of investment strategies without the constraint of a benchmark index allows them to achieve this, while also helping to carefully control investment risks.