Why absolute return bond funds?

There are several challenges facing fixed income investors. Over the last 30 years, a bull market in bonds has led to consistently lower yields. 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 investors in traditional corporate bond funds, this means they may be exposed 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, many fixed income investors are therefore looking for ways to achieve returns regardless of the economic environment and irrespective of traditional benchmark constraints. 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.