In a constrained fixed income environment, investors need to rethink their approach to bonds and adopt a more active approach, according to Royal Bank of Canada's wealth management arm.

At a roundtable held at its London offices yesterday, RBC Wealth Management experts discussed the advantages of incorporating active fixed income strategies into their portfolios and how private investors are coping in a low-yield environment.

“Strategies that can capitalise on the evolving market environment, rather than simply holding an asset to maturity, will be better positioned for gains. A passive approach does not allow investors to be as selective about where and how they take risks to achieve returns within the fixed income space,” said Håkan Enoksson, head of fixed income at RBC Wealth Management.

Despite risk premiums, Enoksson expects the corporate market to become a more attractive proposition for investors.

“Risk premiums in the corporate world have largely been distorted, but as the market environment normalises we expect these to diminish, spreads to tighten, and returns on corporate debt to be boosted relative to sovereign debt," he added.

Fixed income bonds provide a return in the form of fixed periodic payments with the principal amount being repaid upon maturity. They are only moderately risky and as they guarantee income they generally offer a lower return of investment. Since the global financial crisis, the Bank of England and the Federal Reserve have used quantitative easing measures to help improve growth through purchasing bonds, which has increased prices and been one of the primary drivers in pushing down yields.

Guy Huntrods, head of advisory at RBC, says that in a low-yield environment each client has a different starting point that must be reflected into their fixed income implementation.

"We aren’t seeing a great rotation out of fixed income and into equities as markets have picked up, but clients are definitely looking to make their assets work harder by moving out of cash," he said.

“Many investors need to wake up to the fact that the bond market is not a sleepy world that is only limited to returning meagre coupons. There are a variety of factors that create opportunities for a sophisticated fixed income investor, and many investors need to start thinking about bonds in a different way,” he added.

George King, head of portfolio strategy at RBC Wealth Management, argues that fixed income instruments have a vital role as a lower risk component in portfolios.

“Historical returns are now much harder to obtain, depressed by well-documented risks and concerns, but fixed income instruments are still important as a lower risk component within a diversified portfolio. An active approach is paramount to ensure that they are positioned to generate returns without straying beyond their true risk tolerance," he said.

Last week, Royal Bank of Canada’s wealth management arm boosted its Indonesia-focused sales team with three senior bankers. For more on this story, click here.

The firm has over C$593 billion (about $582 billion) of assets under administration, and some C$353 billion of assets under management.