What to do with your bond investments now

Adding inflation-protected Treasury, or TIPS, to a portfolio might not work as well as they have in the past (AP)
Adding inflation-protected Treasury, or TIPS, to a portfolio might not work as well as they have in the past (AP)

Summary

Strategies for investors who need income now and those thinking longer-term

After a wild year in financial markets, many investors ended 2020 with at least a thing or two to smile about. Stocks overall posted solid gains for the year, and coronavirus vaccines are slowly being doled out to the public, bolstering hopes for economic growth this year.

But with interest rates so low, these are rough times for fixed-income investors who need income now from their portfolios. Here’s some advice from investment pros for those investors, as well as those with fixed-income portfolios geared more toward the medium or long term.

If you need income now

For investors in or near retirement, finding income-generating investments has become a tall order. In addition to the low yields on fixed-income investments, last year was one of the worst for stock dividends.

Dividends generally are projected to rebound this year, but when it comes to fixed income, investors might have to get creative. Ken Leech, chief investment officer at fixed-income investment firm Western Asset Management, says the options for income will be limited over the short term but there are areas that offer some opportunities.

“There are high-quality bank loans that are trading at discounts and have the opportunity to provide income to investors," Mr. Leech says. “Bank loans have been out of favor because there were fears about what would happen with the pandemic, but we haven’t seen deterioration in high-quality loans."

Michael Fredericks, head of income investing for BlackRock’s multiasset strategies team and portfolio manager of mutual fund BlackRock Multi-Asset Income Portfolio (BIICX), agrees. BIICX is heavily weighted to bank loans and structured credit heading into the new year. Mr. Fredericks says that by focusing on quality and diversification, investors can craft an exposure that has a similar risk profile to Treasurys.

Both men caution that some classic maneuvers, like adding inflation-protected Treasury, or TIPS, to a portfolio might not work as well as they have in the past, with yields so low. Even if inflation increases this year, those investments are unlikely to do well enough to outperform core Treasurys as the economy recovers, they say.

Adding a small exposure to business-development companies instead could prove beneficial. BDCs did better business than expected last year, in part because of the availability of pandemic relief programs. Some BDCs do nothing but originate loans and took part in originating new small-business loans as part of the Cares Act programs. As Congress moves forward with a second wave of loans, BDCs are positioned to do well into this year.

BDCs pay income out to investors in a way that is similar to bonds and may also include a special dividend based on performance. “BDCs provide the lion’s share of their return back to investors," says Scott Colyer, chief executive and chief investment officer of Advisors Asset Management.

Mr. Colyer says investors should look for BDCs that are well diversified across industries and geographies. “The best-positioned BDCs are going to be those that are originating or investing in senior loans," he says. “Those are going to be repaid first."

Over the medium term

Investors who have a little more time before retirement have more options. 2021 is shaping up to be a year where investors may be able to position their portfolios to take advantage of an emerging global economic recovery.

Emerging-markets fixed-income securities took a beating in 2020 as the pandemic hit many of these economies first. Now, they’re some of the first regions to move into recovery, a trend that should be aided by the virus vaccines. These markets tend to be higher risk than those of other countries, but Mr. Leech says the risk could be worth it now.

“There has been a structural underallocation to emerging markets for many years" by investors, he says. As a result, valuations in emerging markets remain relatively low. “If you look at where we are now, central banks in the developed world have indicated that they will remain very accommodative over the near term. That’s a positive for emerging markets, and as they continue to normalize after the pandemic we are already seeing indicators of a rebound," he says.

The long view

While low yields are likely to be a feature of the fixed-income market for the foreseeable future, advisers are hesitant to say it’s time for a fundamental change in core fixed-income portfolios.

“What we have right now is an acute problem for people who depend on income as a retirement strategy," says Mr. Fredericks. “But if you aren’t in that boat, I think it’s too far to say you should be making permanent changes to the fixed-income side of the portfolio. We expect a lot of this to normalize over the long term."

One option for investors who won’t soon be in need of income from their portfolios: Some exchange-traded funds, like SoFi Weekly Income ETF (TGIF), provide small weekly payouts that can be rolled over and built up over time, allowing investors to bolster their savings without taking on increased risk. The fund’s share price rose 4% last year.

Preferred stocks, stock-bond hybrids that trade like a stock but deliver a set income like a bond, have also done well. Funds like Invesco Preferred ETF (PGX) offer exposure to a broad basket of preferred stocks. The fund gained 7.32% last year, compared with Treasury yields that top out around 1.7%.

This story has been published from a wire agency feed without modifications to the text.

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