What You Need To Know About Fixed Income

What You Need To Know About Fixed Income
Underwater by Andy Deitsch. Why?

Actor Sir Michael Gambon lends his voice to a short video on the perils, pitfalls and opportunities posed by investing in fixed income bonds

In These Uncertain Times Of Trump And Brexit, The Future For Fixed Income Is Unclear To Say The Least, So Here Are Some Valuable Tips To Help

The Fables Of Fixed Income

Based on its huge experience and motivated by tricky investment times, fund manager Aberdeen has published a useful booklet entitled The Fables Of Fixed Income highlighting the potential pitfalls of the investing in the fixed income bond market.  You can download it below.

You can watch a short video on The Fables Of Fixed Income exclusively on Citywire by clicking the image below.

fixed income

Aberdeen Shares Its Fixed Income Experience

According to Apollonius of Tyana, a 1st century philosopher, the fable writer Aesop “made use of humble incidents to teach great truths.” Following in this tradition we hope that this simple guide – illustrated by John Devolle – can help anyone to separate fixed income fact from fixed income fiction and encourage them to explore the wonderful and diverse world of bonds.

We have been investing in bonds for many years and have witnessed numerous market cycles, the invention of many novel types of bonds, and the rise and fall of many investing styles.

Through this evolution, we’ve come to understand many things about what works – and what doesn’t work – in this multi-trillion pound global market.

On the following pages, we set out some of the key things we’ve learned. While these fables are designed to help the novice gain perspective, they may also help more experienced investors to question some of the accepted ‘wisdom’ of the crowd.

Brad Crombie
Global Head of Fixed Income, Aberdeen Asset Management

Read The Fables Of Fixed Income

The Seven Dwarfs - A Tale Of Diversity

Bonds are anything but uniform. They are issued by a wide range of entities – from governments to multinational organisations to young fast-growing companies – and in many different geographies, from the US to Europe to Southeast Asia to sub-Saharan Africa. The risk and return profile of bonds can therefore vary enormously and returns across this diverse universe aren’t necessarily driven by common factors.

The Emperor’s New Clothes - A Lesson In Independence

A bond market index can serve a useful purpose – not least, it can help you track the average performance of a ‘market’. However, this rarely tells you where is best to invest. Indeed, by their very nature, bond indices are weighted towards those bonds that constitute the bulk of the market. So simply tracking an index automatically steers you towards the most indebted issuers, which you might be wise to avoid.

Sinbad The Sailor -A Voyage Of Discovery

In ancient Baghdad, a rich merchant – Sinbad – sat with a porter to recount how he became wealthy in the course of seven wondrous voyages to far-off lands. Sinbad told the porter how he had faced many perils, but this never deterred him from seeking to gather his fortune by trading in the merchandise of the many lands he visited. There are lessons here for bond investors.

The Dog And His Reflection - A Story Of Caution

Bonds deliver income via a series of interest or ‘coupon’ payments. This means the upside for bonds is always limited. The issuer usually has no reason to give you anything more than the payments you have been promised and the return of your capital upon maturity. A good bond investor therefore needs to have a cautious mentality. Seek to avoid those bonds where the issuer is likely to suffer a decline in creditworthiness, rendering them less capable of delivering future payments. 

Dick Whittington - A Story Of Perseverance

At the most basic level, what every investor wants to know about a bond is: ‘Will it pay me what it has promised?’ The most widely-used indicator to help answer that question is the credit rating, produced by independent agencies such as Moody’s, Standard & Poor’s and Fitch. Credit ratings do provide a useful guide to creditworthiness. But it’s vital for bond investors to do their own in-depth research – and not just rely on the same information as the rest of the market.

The Tree And The Reeds - A Lesson In Flexibility

When there is a lot of uncertainty and instability in the global economy, it makes sense to adopt a flexible and dynamic approach to bond investing. Aesop’s oak tree always thought that it was far stronger than the reeds below. Yet it was humbled when a storm uprooted it. The oak tree had always relied on its strength, but found out the hard way that being inflexible was disadvantageous. Reeds may bend – but they very rarely break.

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