The bond renaissance | Wealth Professional

A key conviction shared by Klingensmith is the belief in the gradual decrease of inflation rates. She attributes the initial surge in inflation to pandemic-induced disruptions in the global supply chain, likening the scenario more to a natural disaster than a typical economic cycle. Much of the reduction in inflation can be attributed to a return to normalcy, rather than being directly a result of monetary policy actions, particularly in the United States. With both Canadian and U.S. economists expecting interest rate cuts, on the back of encouraging inflation rates, long-term bonds are in high demand. 

The multi-sector approach: a diverse path to returns

Klingensmith says, “Last year, our outlook on bonds was highly optimistic because we anticipated benefiting from the curve shifting from an upward to a downward trajectory. This year, the situation is more subtle. It’s really important to think about asset allocation in the bonds versus anything else, particularly when comparing the potential of bonds of any duration against holding cash.”

Klingensmith elaborates on the strategic importance of accessing a vast global fixed income universe while diversifying risk to enhance returns. This approach is crucial at any point in the economic cycle, as it prevents the fixed income portfolio from mirroring the volatility of equity portfolios. The multi-sector strategy, particularly through funds like Canada Life Global Multi-Sector Bond Fund, also available in Segregated fund as Global Multi-Sector Bond, aims to identify pockets of value and opportunities for better returns with lower correlation to traditional risk assets.

“Equity markets have performed impressively relative to other risk assets, yet there are compelling reasons to believe they are currently overvalued. In contrast, when considering risk assets, it’s essential to evaluate the valuation and total return potential of bonds. This year marks a significant departure from previous years in terms of our investment focus. While the yield curve was once a primary concern, our attention has shifted. We still consider our position within the curve, but our emphasis is now on exploring opportunities across multiple sectors and countries,” she emphasizes. 

Dual, dynamic and defensive

BGIM’s fund management strategy is guided by “three D’s”. Firstly, a dual approach ensures that the asset managers understand the fund holdings well, avoiding the pitfalls of over-diversification and liquidity challenges. The managers assess the top-down macroeconomic and bottom-up fundamental factors. This deliberate strategy contrasts sharply with other funds that may spread their investments too thinly across numerous sectors with less regard to the big picture themes.