Advisors Turn To Non-Traditional Fixed Income Investments - New Survey

Harriet Davies

24 July 2012

Advisors are favoring less traditional income-producing investments such as emerging market bond funds and dividend-paying equities, according to a survey from OppenheimerFunds.

The survey was conducted at the Morningstar Investment Conference in Chicago on June 20 and 21.

In response to a question about which investments they were most likely to recommend to clients, 84 per cent of advisors cited dividend-paying equities and 76 per cent said emerging market bonds or related bond funds.

“I believe the traditional asset allocation model will be unable to generate the real returns needed to sustain a quality standard of living," said Lori Heinel, chief investment strategist at OppenheimerFunds. "In addition to seeking yield, today’s investors need to look across the globe to find the best opportunities for growth while educating their clients about how certain opportunities can potentially reduce risk in their portfolios, a sentiment we see reflected in our survey data.”

There was a clear appetite for emerging market exposure among advisors, with only 3 per cent saying clients “don’t need” such exposure. Advisors preferred to access emerging markets directly too, with over half saying the best way to get exposure was through funds investing directly in growth markets. Meanwhile, 26 per cent preferred to hold companies domiciled in developed countries but not the US, while 21 per cent preferred large multi-national US companies as an indirect route to emerging markets.

However, there has been a slight pullback in international exposure generally (as opposed to EMs specifically) as the eurozone has worried investors. Since the eurozone crisis began, 43 per cent of advisors in the survey have reduced exposure to international bonds while 41 per cent have shied away from international equities. The euro crisis also remains the number one issue by far affecting advisors’ advice to their clients, the survey found.

Perhaps reflecting the way global political and economic woes have rumbled on, few advisors said clients’ risk tolerance had picked up since last year. In fact, over half of advisors said they have seen clients’ risk tolerance drop over the last year, and a further 35 per cent said risk tolerance levels remain around the same as a year ago.

Advisors felt their biggest challenges were protecting clients from downside risk and volatility, as well as managing clients’ fears about the equity markets and helping them to earn the real yield they need on their fixed income portfolios.

“Sadly, clients who are sitting on the sidelines are likely to lose wealth when inflation is factored in,” said Heinel. “The key is to get them to think beyond the current headlines. Many investments offer good value to long-term investors.”