There is no question that persistent low interest rates are a challenge for investors trying to meet their goals. Meeting this challenge may require some new thinking.
One option for bond investors is emerging market debt in hard currency, which offers a yield pick up along the entire term structure when compared to advanced economy debt.
Looking at overall portfolios, we think returns might also be boosted by adopting a multi-asset class approach. Historical data indicates that portfolios that are more balanced across asset classes (for example, have a more equal allocation between stocks and bonds) offer better return potential at lower volatility than portfolios skewed towards a single asset classes. They also have additional benefits from a risk perspective. Such asset allocations can be implemented in an easy and cost-effective way among other things through ETFs.
We think investors may also find additional yield by looking beyond traditional benchmarks, for example through factor investing. Also known as “smart beta” investing, factor investing involves focusing on investments with certain characteristics, for example value, quality, low volatility or high dividend stocks. Academic research has found that such characteristics are likely to outperform markets over the long term. ETFs, based on Novel rules-based indices, can be an excellent and cost-effective tool to implement such strategies.