While the search for yield is top of mind for most U.S. fixed-income investors, Franklin Templeton’s research shows three in four (74%) are concerned about how rising rates will impact their portfolio in the months or years ahead. The findings are from “Franklin Templeton Fixed Income Pulse.”
Key findings from the survey show respondents’ concerns are fueled by historically and persistently low levels of U.S. interest rates, which translate into lower yields offered on the typical fixed-income investment. Importantly, 71% of investors believe interest rates will be higher in 2016; however, less than half of respondents fully grasp the relationship between interest rates and bond prices, Franklin Templeton researchers note. In fact, fewer than half (48%) of those polled correctly stated that bond prices tend to go down when interest rates go up.
A vast majority (94%) of investors say risk management is also an important factor when choosing a fixed-income investment or manager. Furthermore, the survey report finds 70% of respondents are invested in actively managed fixed-income funds, likely to help address the risks presented by rising interest rates and other challenging market factors.
As the report explains, investors are particularly concerned about an anticipated increase in the 10-year Treasury rate. These treasury notes form a significant component of many longer-term bond portfolios held by investors today, Franklin Templeton explains. Should the 10-year Treasury rate rise, many longer-term bond portfolios held by investors today can likely be expected to decline in value, the research suggests.
So what is a traditional fixed-income investor to do? Michael Hasenstab, chief investment officer for global bonds at Franklin Templeton Fixed Income Group, says it is time for investors to “think outside traditional boxes.”
“It’s our conviction that we are at the end of a 30-year decline in interest rates,” Hasenstab says. “We need to prepare for the next decade when interest rates will likely be rising, and we believe an attractive alternative is a portfolio that is actively managed, global and unconstrained.”
Ed Perks, chief investment officer of Franklin Equity Group, suggests the current environment makes a strong case for active management for fixed-income portfolios.
“Fixed-income investors need to understand that if they choose passive investments such as index funds, they are essentially choosing to follow the herd,” he says. “That means buying what’s popular and selling what may be only temporarily out of favor, rather than actually evaluating whether issues are overbought or present true bargains.
“There is nobody at the helm looking forward and evaluating, for example, whether a rise in rates is a brief spike or the beginning of a longer-term trend,” Perks adds.
Additional key survey findings show 60% of investors stated they had roughly half or more of their investments currently in fixed income. Over half of those surveyed stated their financial adviser, either in the workplace or hired independently, was their primary source of financial information on this and other financial topics.
Franklin Templeton’s fixed income survey, conducted by Qualtrics, included a sample of 525 U.S. investors aged 25 and older with $100,000 or more in investable assets, excluding the value of their home. In addition, respondents all owned investments in fixed-income securities. The survey was completed online from October 6 to October 8.
Additional findings of the fixed-income survey are presented here.