The great rotation: What it means for client portfolios

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The shift from bonds to equities could have a significant impact on your clients’ portfolios, particularly those hitting retirement at the same time, according to AXA Investment Managers.

A great rotation is a big shift of strategic long term asset allocation driven by a combination of factors, including: long-term risk budgeting, the regulatory environment, monetary policy and liquidity.

AXA IM's director of Australia & New Zealand, Craig Hurt, said any ‘great rotation’ of investor portfolios from bonds to equities could have multiple repercussions on investment decision making.

“We evaluated the concept of a great rotation with regards to investors’ long-term investment objectives. The impact of a great rotation in global markets on the average Australian could be significant if their asset allocation is not given due attention,” he said.

“Similarly, if there is indeed a great rotation out of bonds and into equities at the same time Australian retirees are moving out of equities and into bonds in the search for a reliable income stream, then retirees may find themselves on the wrong end of a big global trade,” Hurt said.

Reducing portfolio duration, adding inflation protection and yield pick-up, are all viable options for fixed income investors in an environment of asset class rotation.

AXA IM says there are a number of important questions clients should ask, to understand the risk of significant asset allocation shifts from bonds to equities:

  • Will other assets offer greater certainty of higher returns if bond yields are to remain very low?
  • Are we on the verge of a bond bear market that will generate a period of negative returns in fixed income?
  • If that is the case, will it be through higher interest rates or a re-pricing of credit risk premiums?
  • What can bond investors do in an environment of asset class rotation?

Such questions are even more important for an ageing Australian population as they move from the accumulation to decumulation phase.