Alfred Murata, Portfolio Manager of the PIMCO GIS Income Fund
Equity-like returns from high quality bonds? Two years ago, that was a very far-fetched idea. Today, however, things are very different.
Indeed, it is a measure of how much circumstances have changed that the greater risk now is of not allocating enough to fixed income.
"The comparison that investors have to make is between the expected returns in fixed income, which have increased substantially, or those from equity markets, which haven't to the same extent," says Alfred Murata, Portfolio Manager of the PIMCO GIS Income Fund.
"Putting it simplistically," he explains, "if bonds are yielding 4% then it might be attractive to invest in equities if you think the expected return is going to be 8%. But if bonds are yielding around 7%, as they are now, then you ought to be looking at, say, 10 or 11% from equities. That sort of return is much harder to find."
Moving up the credit spectrum
Fixed income investors also risk missing out if they only stick to the safest bonds, warns Josh Anderson, fellow PIMCO GIS Income Portfolio Manager.
"People are pretty happy right now because they're getting so much yield on their government bonds," he says, "but if they go out just a little bit more in the risk spectrum, they can pick up several hundred basis points in yield.
"I think there's an under-appreciation of how much potential total return and yield investors are going to give up by being in the safe government securities. Over a three or four-year period, staying very, very safe can add up to a lot of return left on the table."
For more on the opportunities in fixed income today, read our exclusive Spotlight guide.
