San Francisco, April 24, 2013 (GLOBE NEWSWIRE) -- Based on trends suggesting that the 30-year bull market for bonds is ending, investors should consider diversifying their traditional bond allocations among a variety of income-generating asset classes, recommends a new study from Forward (Forward Management, LLC).
The title of the study, The 5% Problem: Double Jeopardy for Bond Investors, is a reference to the 5% long-term average annual yield for U.S. government bonds from 1926 through 2012.* The report states that even though inflation-adjusted yields on 10-year Treasury notes have been less than zero since January 2012, profits from rising bond prices have "lulled" investors into feeling their bond investments are safe. The total return from a traditional government bond index averaged 8.8% annually from 1981 through the end of 2012, with appreciation accounting for 40% of returns during this bull market period, according to Forward's analysis.
"Treasurys and other traditional bonds are widely assumed to be 'safe,' but are just as subject as any other fixed-income investment to losses in value should interest rates rise," said Nathan Rowader, Forward's director of investments and author of the study. "Those risks are greatly heightened as the bond market shifts toward a bearish climate."
In fact, with a rise in interest rates investors could lose even more value in their existing bond portfolios than they stand to gain in annual after-tax return, Forward's study found. For example, an investor who had bought $1 million in 10-year Treasury notes in January 2013 would earn $5,151 in after-tax return annually. With a 1% rise in interest rates, the value of that investment would plummet by $51,700.
"The evidence that we are entering a bear market climate for bonds is strong. The current blend of low yields, moderate inflation, and high public debt levels is almost identical to market conditions in 1941, when the last bear market for bonds began its forty-year run," said Rowader.
The study recommends that those heavily invested in traditional bonds diversify among a variety of income-generating asset classes, including domestic and foreign dividend stocks, real estate investment trusts (REITs) and global corporate bonds, while maintaining some exposure to U.S. government bonds. It suggests that investors may also benefit from tactical bond strategies that dynamically shift assets among bond market sectors with changing market conditions, the analysis suggests.
Based on historical analysis, Forward's research concludes that a hypothetical diversified portfolio would have produced higher risk-adjusted returns than Treasurys over the course of the 1941-1981 bear bond market. It would also have produced positive inflation-adjusted returns for the 40-year period, which Treasurys did not.
"Thanks to the increased accessibility of global investing, and the availability of new investment options such as emerging market corporate bonds, investors today have access to a much wider range of income-generating investments than they did twenty or thirty years ago," said Alan Reid, CEO of Forward. "We believe that diversifying bond portfolios is the most sensible way to reduce portfolio risks in a shifting bond market environment."
As an outcome-oriented asset manager, Forward is helping to meet investors' diversification needs by offering a variety of income-focused strategies, said Reid, including dividend, emerging market corporate bond, multi-sector bond, and multi-asset class approaches.
About Forward
The world has changed, leading investors to seek new strategies
that better fit an evolving global climate. Forward's investment
solutions are built around the outcomes we believe investors need
to be pursuing - non-correlated return, investment income, global
exposure and diversification. With a propensity for unbounded
thinking, we focus especially on developing innovative alternative
strategies that may help investors build all-weather portfolios. An
independent, privately held firm founded in 1998, Forward (Forward
Management, LLC) is the advisor to the Forward Funds. As of March
31, 2013, we manage more than $6.1 billion in a diverse product set
offered to individual investors, financial advisors and
institutions.
You should consider the investment objectives, risks,
charges and expenses of the Forward Funds carefully before
investing. A prospectus with this and other information may be
obtained by calling
(800) 999-6809 or by downloading one from www.forwardinvesting.com.
It should be read carefully before investing.
There are risks involved with investing, including loss of principal. Past performance does not guarantee future results, share prices will fluctuate, and you may have a gain or loss when you redeem shares.
Foreign securities, especially emerging or frontier markets, will involve additional risks including exchange rate fluctuations, social and political instability, less liquidity, greater volatility and less regulation.
Investing in the real estate industry or in real estate-related securities involves the risks associated with direct ownership of real estate which include, among other things, changes in economic conditions (e.g., interest rates), the macro real estate development market, government intervention (e.g., property taxes) or environmental disasters. These risks may also affect the value of equities that service the real estate sector.
*Source: Ibbotson Associates; The 5% Problem: Double Jeopardy for Bond Investors
Nathan Rowader is a registered representative of ALPS Distributors, Inc.
Alan Reid is a registered representative of Forward Securities, LLC.
Forward Funds are distributed by Forward Securities, LLC.
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