Advisers should rethink 'index-hugging' investments

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Advisers should rethink the "index-hugging" approach to defensive investment allocations, a new white paper has claimed.

A new white paper by Western Asset titled “Defending the Defensive: Protecting Your Fixed-Income Portfolio in a Low-Yield World,” has urged advisers to look at "active and unconstrained strategies" for fixed income investors.

“Central bank rate cuts, quantitative easing, a subdued global recovery and low inflation have left global bond yields at near-record lows. Against this background, a more flexible, active approach can provide the latitude needed to best position this ‘defensive’ asset class, which acts as a ballast to risk assets such as equities," Western Asset head of Melbourne operations and investment management Anthony Kirkham said.

The white paper claimed more active, unconstrained strategies without the obligation to track the benchmark had the potential to buck prevailing market forces and offer alpha returns.

“Unconstrained fixed-income strategies seek to achieve their objectives during both bullish and bearish bond environments, by rotating between government and spread sectors as well as managing duration, yield curve and volatility,” Kirkham said.

“Unconstrained is all about being nimble, responding to macroeconomic forces and seizing opportunities. It’s not something fixed-income has always been known for, but unconstrained funds are now becoming an important part of the mix because of their responsiveness."