Paid for by John Hancock Investment Management®
It’s a pivotal moment for many investors, where the decisions they make over the next several months will have a major impact on their portfolio for years to come. With the stock market hovering at historic highs, further gains may be hard to come by. Meanwhile, high-quality bonds are presenting attractive investment opportunities not seen in nearly two decades, with yields¹ finally rebounding from historically low levels. This shift in the landscape offers investors an opportunity to lock in potentially substantial and long-term returns through yield-producing strategies. Investors and financial advisors, who may have leaned on cash vehicles like money markets and certificates of deposit (CDs) within the past several years have to be nimble to recalibrate their strategies to potentially capture the yield from the opportunities presenting themselves now in the bond market.
“There’s a narrative out there that the 60/40 portfolio (of equity to bonds) is dead,” says Emily Roland, co-chief investment strategist at John Hancock Investment Management. “We believe that it’s alive and well.” As clients have looked elsewhere, focusing on CDs and cash to generate potential returns, financial advisors may need to rethink their education strategies to help clients see the importance of bonds in their portfolio as income-generating potentials. Here, in the first of a four-part series about how financial advisors can educate their clients on fixed income strategies, a panel of accomplished investment professionals come together to share why yield should be a key topic to discuss with clients over the next few months.
Meet the panelists
The market hasn’t been “business as usual,” but the environment is changing
Pandemic-driven dynamics, including a supply and demand imbalance, coupled with an unusual inflationary backdrop led to bonds not performing as expected in the past few years, which may make investors question how bonds “should” live within their portfolio. It’s important for financial advisors to recognize this reckoning. “We’re taught that bonds are your volatility buffer, your diversifier, your income-producing part of your portfolio,” says Emily Roland, co-chief investment strategist at John Hancock Investment Management. “So I think the conversation starts there.”
Roland says reflecting on the past set of circumstances anchors conversations into what future role bonds may continue to play in a portfolio as they potentially return to a reliable income-generating asset. Although the market has shown mixed data on inflation and growth, resulting in fluctuating yields, investors who buy and hold bonds as the macroenvironment continues to stabilize tend to see results as they wait for elevated income.
And there are reasons for investors to act quickly. Not only is the aggregate bond index yielding nearly 5% (FactSet, June 30, 2024)—a high within the context of the last 20 years—but, according to Roland, “bonds represent a mispriced asset class in our view,” adding that assets like investment-grade corporate bonds, which typically trade above par,² are now trading 90 cents on the dollar. “There are opportunities in other spaces, like the equity markets, but they’re not on sale. The carnage we’ve experienced the last few years means that bonds are on sale.”
The time to act is now
“What we’re seeing now is disinflationary forces reasserting themselves,” says Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, pointing to pillars including the used car market and the housing market. In particular, Miskin says that normalizing forces within the housing market are showing signs that disinflation may be happening sooner than some may expect. “We’re seeing housing sentiment data more broadly start to moderate. It hasn’t happened yet, but we really wouldn’t be surprised by the end of this year if housing prices start to slow down significantly. And if that happens, then inflation likely hits the Fed’s 2% target sooner than the market thinks,” says Miskin.
But investors who wait for that moment may miss out on potential double-digit returns for high-quality bonds. “If you wait until after that year to put that money to work, you missed it,” says Miskin. “You’re then getting back to low single digit type income returns.”
Miskin says financial advisors are having conversations with clients about potentially allocating a portion of the portfolio to investment vehicles, like bonds, that produce yield. This gives investors the opportunity to get “paid to wait,” and that this strategy ensures that investors don’t miss out on compelling potential returns.
Educating clients on additional high-yield opportunities
At this moment, it can be smart for investors and clients to think critically about what role cash and CDs are currently playing in the portfolio. “We’re hearing financial advisors say that their clients are getting used to a 5% return on CDs,” says Roland. But the short-term gains may be causing clients to miss out on the role of bonds and other yield-producing investments. “There’s an opportunity to move out on the yield curve and lock in an attractive income stream for years,” says Roland.
There are very generous yields available in the private space, whether it be direct lending or asset-based lending in more and more of the options to invest in,” notes John Bryson, head of investment consulting, investment data analytics and education savings at John Hancock Investment Management, who is seeing advisors invest in alternative yield strategies, such as semi-liquid strategies, interval funds, and tender offers.³ The benefit of these options, says Bryson, is a different return pattern that’s less correlated than some of the traditional public fixed income categories. This can help investors with portfolio diversification, as well.*
In this rapidly evolving landscape, yield-producing strategies may be an essential way to future proof a portfolio, and it’s important for clients to be ready to meet the moment. As a rare window approaches for investors to help secure potential long-term returns, financial advisors can guide their clients toward a strategy that helps them potentially avoid some of the pitfalls of cash and short-term instrument overinvestment. As the time comes to act decisively and recalibrate portfolios, financial advisors play a key role in helping clients embrace yield as a robust investment strategy now and for the future.
¹A bond’s yield is the return an investor expects to receive each year over its term to maturity.
²A par bond is a bond that sells at its exact face value.
³These are examples of alternative yield strategies:
Semi-liquid strategy involves investing in a private credit fund that invests in a pool of private assets some of which are structured to give investors periodic, often monthly, distributions.
An interval fund is a closed-end mutual fund that doesn’t trade on an exchange and only allows investors to redeem shares periodically in limited quantities.
Tender offer funds are continuously offered closed-end funds that are not listed on a stock exchange and seek to provide investors with liquidity by offering to repurchase a percentage of their outstanding shares.
*Diversification does not guarantee a profit or eliminate the risk of a loss.
From John Hancock:
This article was paid for by John Hancock Investment Management and created by Yahoo Creative Studios. The Yahoo Finance editorial staff did not participate in the creation of this content.
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This material does not constitute tax, legal, or accounting advice and neither John Hancock nor any of its agents, employees, or registered representatives are in the business of offering such advice. Please consult your personal advisor for information about your individual situation. These views and opinions are subject to change and do not constitute investment advice or a recommendation regarding any specific product or security. Portfolios that have a greater percentage of alternatives may have greater risks.
