Important Information

This page and the content contained therein is for professional investors only.

The views expressed represent the opinions of TwentyFour as at 1 November 2023, they may change and may also not be shared by other entities within the Vontobel Group. TwentyFour, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in securities (or related derivatives) identical or similar to those described herein.

Past performance is not a reliable indicator of current or future performance and an investment can go down as well as up meaning capital is at risk. Any projections, forecasts or estimates contained herein are based on a variety of estimates and assumptions. There can be no assurance that estimates or assumptions regarding future financial performance of countries, markets and/or investments will prove accurate, and actual results may differ materially. The inclusion of projections or forecasts should not be regarded as an indication that TwentyFour or Vontobel considers the projections or forecasts to be reliable predictors of future events, and they should not be relied upon as such.

What are the benefits of investing long term vs. short term?

The negative returns across all asset classes have created a mentality of fear. And where investors normally look back over a long timeframe, this has now become compressed and is stopping them allocate on a more normalised medium-term basis, which is responsible for the 30-50% allocation to cash and short-term government bonds.

Ben Hayward

Partner, Chief Executive Officer

Meet Ben

Are you investing with a short-term outlook?

Investing with a short-term outlook gives a significantly lower stability of returns, as any volatility can heavily skew performance, and it becomes a bet on market timing rather thanm ore justifiable factors, such as yield.

Indeed, 50 years of market data, including through periods such as today’s, shows that investing on a long-term basis providesmore predictable returns. Fixed income should be a lower-volatility asset-class, and the yield you invest at should be a great guide as to what expected returns should be.

If you invest for a one-year period at a 3% or 6% starting yield, you have roughly the same range of annualised return outcomes, and the total range from -16% to +19% is material. So, the yield you invest at isn’t a great driver of expected returns over the short term – it only defines 40% of the annualised returns.

However, if you invest for three or five years the return is 80% to 90% driven by the yield you lock in at, and so your expected return is much more correlated and consistent.

What do you expect yields to do looking forward?

Allocations to cash and cash substitutes are also very high right now, in some cases 30% to 50%.

We know that if investors are in cash, then all the good news is behind them as market pricing clearly shows cash rates going down over the next couple of years.

While they might look attractive in comparison to the last 15 years, your returns are going to deteriorate and ultimately disappoint, making it very difficult to achieve your financial goals going forward.

If we look at cash rates at the moment, and we compound those over the next three years, we only get a return of around 15%.

The main driver here is the need to reinvest all your principal and the interest earned at continuously lower yields – i.e. reinvestment risk.

But a bond portfolio that yields 7% provides compound returns over the same three-year period of around 23%. A bond portfolio that has a 10% yield returns 34% over that same three-year period. Investor returns are better because of the higher yield but also due to not needing to reinvest the principal.

The excess returns between cash and a 7% portfolio is 8 percentage points over three years or 19 percentage points for a 10% portfolio. And so, the big question is how are investors going to feel in three years if they could have had a 23% or 34% return, but only got 15%?

What is different now?

The current environment is very different to 2021. The change in monetary policy, as central banks have hiked rates, has created uncertainty in markets and price volatility.

The main protection you have as a bond holder against market volatility is the yield at which you buy your bonds, and this was very low in 2021. So, we had an environment where there was less protection, and a bigger change in the main driver of performance: monetary policy.

Today, bond markets have materially higher starting yields that provide significantly more protection. At the same time, central banks have already done a lot of the heavy lifting, so the risk of a similar round of rate hikes is much lower given expectations that central bank policy is at the peak already.

So, what do we think about it all?

We know investing short term gives less certainty of performance. We know the Fed is saying yields will ultimately come down. We know reinvestment risk is materially greater in cash, and total return is more volatile as yields change. We know you get a better compounded return in bonds than in cash. And we know that from here a rally can happen quickly and materially impact investors’ returns.

And that is why we think we must continue to ask how investors are going to be thinking in three years’ time about what they’ve achieved, based on decisions they’re making today.

9 Nov 2023 Event Replay

Short Term Bond Strategy Update - November 2023

In the session, Chris Bowie and Johnathan Owen, provides an update on the Vontobel Fund - TwentyFour Absolute Return Credit Fund and Vontobel Fund - TwentyFour Sustainable Short Term Bond Income.

Watch now

Important Information

This page and the content contained therein is for professional investors only.

The views expressed represent the opinions of TwentyFour as at November 2023, they may change and may also not be shared by other entities within the Vontobel Group. TwentyFour, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in securities (or related derivatives) identical or similar to those described herein.

For Professional Clients only. This is a financial promotion and is not investment advice. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes.

7 Nov 2023 TwentyFour Blog

Fed survey points to a slowdown of the US economy

Following yesterday’s publication of the quarterly Senior Loan Officer Opinion Survey (SLOOs) by the Fed, it revealed how lending conditions have evolved over the quarter amongst US banks.

The past two years have been exceptionally challenging for fixed income investors. Spiralling inflation led to one of the most aggressive rate-hiking cycles on record, however, we believe the market for bonds is now looking much healthier.

But, while bonds are once again finding their form, investors have found themselves sitting on cash balances of 30% to 50%. This capital preservation trade has made perfect sense, but does it still make sense as we reach terminal rates? The opportunity cost right now of having no duration, and therefore no chance of future capital gains, could be doing a disservice to clients.

Some corners of the bond market look more appealing than others, with short-duration bonds proving particularly compelling. One of the main drivers of this is that yield curves remain inverted. In normal market conditions, yields for longer-dated bonds are higher than shorter-dated ones. But in current market conditions this appears to not be the case, with the yields on one-year bonds higher than those with maturities of 10 or 30 years.

Read more below on why we believe the time is right for fixed income and why short-dated bonds, in particular, could be the answer to the cash dilemma.