Gary Dugan, CEO of Purple Asset Management, reviews the role of bonds in an investment portfolio.
Bonds are fixed income investments which work by enabling investors to loan money to an entity (for example to government for an infrastructure project) who borrows for a defined period in exchange for a fixed interest rate, known as the yield. Any yield is generally paid on an annual basis for the life of the bond. The original investment is then returned.
The current question, given low yield rates, is whether it is still possible to make money out of a bond. One positive point of note is that even with negative interest rates, bonds can create capital gains. So despite very low yields there are still opportunities to be found. Bonds are also good for creating a more diversified portfolio, whilst offering some return enhancement on your investment. With equity markets performing well in 2019 the diversification benefit is useful; especially if global markets come into difficulty or collapse.
Other positive reasons for bonds include the fact that central banks are very supportive of them, with interest rate cuts and quantitative easing all helping the credit, or corporate debt, market. Bonds also support emerging countries, enabling them to cut interest rates, and help promote growth in those areas.
When considering bonds as part of an investment portfolio, we encourage investors to ensure their financial planning investment strategy is aligned with the risk they can tolerate. To discuss any aspect of your financial planning please contact your nearest office.
For more information on a range of other investment topics please visit our Investment Library.
Julian Broom, Chief Investment Officer