2012 Issue 1
Issue Features
- Examining Global Investments With a Fresh Perspective
- Managing Equity Risk in Volatile Markets
- DC Plan Considerations When Terminating or Freezing a DB Plan
- Responsible Investing Goes Mainstream
Column: Voices
Departments
Department: Global Megatrends
Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.
The Search for Yield
Income-seeking institutional investors face a challenging global financial environment as they look to enhance the yield of their investment portfolios. Both low growth and low inflation have kept downward pressure on interest rates and, as a result, the yields on high-quality government and corporate bonds, such as the 10-year U.S. Treasury bonds. While a traditional source of yield for investors, yields on high-quality corporate and government bonds have been trending downward since the 1980s. Given recent statements by the European Central Bank and the U.S. Federal Reserve Board, the situation is expected to persist through 2012 and 2013. Against this backdrop, investors will need to look to new sources – including investment strategies and asset classes – for the potential to replace yield from traditional sources.
Adapting to the New Reality
Interest rates on high-quality corporate and government bonds have been trending downward for years, even decades, compelling institutional investors to seek other sources of yield.
Interest Rates to Remain Low
Consensus projections for interest rates, as represented by the rates on 10-year sovereign bonds, indicate investors may be dealing with a low-yield environment through the end of this year and beyond.
Potential Sources of Replacement Yield
With interest rates on many high-quality government and corporate bonds at historical lows, adding less traditional income-generating strategies to a portfolio can help replace lost yield.
“Investors may need to consider additional sources in their search for yield. Strategies such as high-yield bonds, high-dividend equities, income/equity (such as preferred and convertible securities), emerging market debt and even hedge funds can help squeeze additional yield out of a portfolio. These strategies also carry specific risks and investors will need to fully understand the impact each would have on the overall portfolio.”
- Andrew C. Smith, CFA, CAIA
chief investment officer,
Client Solutions Group, Northern Trust
© 2013 Northern Trust Corporation
northerntrust.com
Past performance is not necessarily a guide to the future. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Index performance is based upon information provided by the index providers. There are risks involved with investing, including possible loss of principal. There is no guarantee that the investment objectives of any fund or strategy will be met. Risk controls and asset allocation models do not promise any level of performance or guarantee against loss of principal.
This material is directed to eligible counterparties and professional clients only and should not be relied upon by retail investors. For Asia Pacific markets, it is directed to institutional investors, expert investors and professional investors only and should not be relied upon by retail investors. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy or product described herein. This information is not intended as investment advice and does not take into account an investor’s individual circumstances. Opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, but its accuracy and interpretation are not guaranteed.
Asset management at Northern Trust comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., the investment adviser division of The Northern Trust Company and Northern Trust Company of Connecticut and its subsidiaries to offer investment products and services to personal and institutional markets. Northern Trust Global Investments Japan, K.K. is regulated by the Japan Financial Services Agency. The Northern Trust Company has a branch in China mainly regulated by the China Banking Regulatory Commission, People’s Bank of China and State Administration of Foreign Exchange. The Northern Trust Company of Hong Kong Limited is regulated by the Hong Kong Securities and Futures Commission. In Singapore, Northern Trust Global Investments Limited (NTGIL), Northern Trust Investment, Inc. and Northern Trust Company of Connecticut, Inc. are exempt from the requirement to hold a Financial Adviser’s Licence under the Financial Advisers Act and a Capital Markets Services Licence under the Securities and Futures Act with respect to the provision of financial services. In Australia, NTGIL is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act 2001 in respect to the provision of financial services. NTGIL is regulated by the FSA under U.K. laws, which differ from Australian Laws.