“Low for Longer” is Blackrock’s investment theme heading in to 2014. The Low for Longer tag line is their way of expressing a forecast of tepid economic growth, easy monetary policy and, consequently, low interest rates. Investment catchphrases such as this are common among the big investment firms, but we think this one holds water. With interest rates near an all-time low, we believe traditional bond investment strategies may struggle as interest rates continue to rise to more normal levels.
Earlier this year we made substantial changes to the fixed-income side of your portfolio. (You may recall Bryan’s Q2 newsletter announcing the changes.) The big changes came in the form of more actively managed bond funds. These funds are very different from other bond funds because they are not tied to a particular investment style or index. They have the flexibility to invest in whatever areas of the bond market they feel are most attractive. As we look back at 2013, I thought it would be interesting to evaluate how the new bond funds are navigating the Low for Longer environment.
As I type this letter, the Barclays Aggregate Bond Index is down 1.5% year-to-date. Long-term treasuries are down even more. But here’s the good news: All of the new bond funds that were purchased for you this year have made money (YTD), even though the bond market has struggled. The performance details are listed in the chart below:
If BlackRock’s view is correct, and we find ourselves in a “Low for Longer” environment, this does not change our view of bonds as an asset class. After all, bonds are ultimately one of the greatest diversifiers investors can own. For our more conservative and moderate clients, we will continue to have meaningful positions dedicated to fixed income. What has changed is how we gain access to bonds as an asset class. Going forward, we are confident that active management will continue to play a crucial role in the ever-changing bond market.
Source: Morningstar.com (YTD as of 11/30/13)