The "Great" Rotation into Fixed Income?

I wanted to share a recent article covering Barron's recent round table discussions on Fixed Income and investment trends.

An even greater rotation into fixed income? Quite a thought, as we're constantly being told that the opposite is occuring... But let's look at the bigger picture.

Every day, more than a thousand Canadian boomers turn 65. The trend is expected to continue for the next 17 years. And as they enter into the drawdown period, they're looking for ways to turn their nest eggs into retirement income.

This has resulted in the need to fundamentally shift their asset mixes, Rick Headrick, president of Sun Life Global Investments, told a lunchtime audience at an advisor event recently.

"In 2000, 70% of portfolio holdings were sitting in equities, while only 14% were in the income categories," he says. "Today 44% is allocated to fixed income."

The other major investment trend, he adds, is corporate-class bonds. For non-registered assets, it's a tax-efficient way to draw income out. In fact, last year, the bulk of net flows into corporate class were allocated to fixed income.

So for all the talk of the great rotation into equities, current flows suggest if there's any rotation, it's into fixed income.

"Equity funds have been in net redemption each of the last four years," says Headrick. "Certainly there's been a flight to safety as well, but it's also because of that thirst for yield."

Corporate class' first major advantage is the ability to switch between funds within the structure. If you wanted to trim your Canadian equity weighting, and move more into emerging markets, you could do that within corporate class without triggering a tax event.

Another big advantage: efficient taxable distributions. A corporate mutual fund company can pay out Canadian dividends, which are taxed more favourably than interest income or foreign dividends. Also, on redemption, only 50% of capital gains are taxable.

The structure can cancel out gains and losses for tax purposes. (If you have one fund sitting in a gain position and another in loss, they offset each other.)

But these advantages can come at a cost.

Corporate class fixed-income funds have higher fees relative to the mutual fund trust version. But that's ok because tax efficiencies more than offset those higher fees.

Headrick notes another wrinkle in the form of the disconnect between investors' risk appetite and their return expectations:

"Currently only 22% of investors are willing to take on more risk to get a higher return, yet 40% expect their investments to yield 5% to 7%, he says.

That means the traditional asset mix of fixed income and Canadian equities won't cut it.

"Investors need to diversify into infrastructure (toll roads, airports, etc.), real estate, emerging market debt and other non-traditional asset classes to create sustainable income in retirement," he asserts.

Something that we tend to fully agree with.

Please give me a call/email if you would like to discuss your current asset mix, investment policies, or to review what options in the non-traditional space are available to you.

Best Regards and Safe Investing!

Eric