Amy Xie Patrick: what is the role of fixed income in a portfolio

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What is the role of fixed income in a portfolio right now? Pendal portfolio manager Amy Xie Patrick explains here and outlines the team’s strategy for its Dynamic Income Fund.


Watch the video above or read the transcript below.


What is the role of fixed income in a portfolio?

Fixed interest has two main roles in the portfolio: to provide diversification and generate income. Now, with diversification, let’s face it, nobody likes to see one part of their portfolio fall, even though other parts of their portfolio, maybe rising. But we all need some portion of our portfolio to be defensive in times of market stress.

And that’s what we really mean when we talk about diversification. Interest rates exposure, through high-quality government bonds, provides this kind of defensiveness.

The Pendal Dynamic Income fund seeks primarily to play the role of income through maintaining an ability to shift between asset classes — some that are income and risk-seeking, such as investment-grade credit and emerging markets; and others that are more defensive such as government bonds.

As a result, it is a much more defensive product, than most high yield or hybrid funds, but is unlikely to provide the same degree of shelter and crisis liquidity as composite cell products, such as the Pendal Fixed Interest fund.

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Why has Pendal’s Dynamic Income Fund experienced a faster recovery?

The Dynamic Income Fund benefits from tried-and-tested design, where we have focused on switching off the riskiest piece quickly and efficiently. For this fund, this is emerging market sovereigns. As risks mounted earlier this year, we made two key asset allocation decisions.

The first was to reduce emerging market risk from 25% to almost zero in just a matter of days. Had this portfolio been a quarter exposed to offshore high yield bonds or Australian hybrids, this kind of de-risking simply could not have happened as market liquidity dried up.

Although the fund suffered losses over this period, our swift de-risking out of Emerging Markets (EM), meant that we avoided the worst of those losses. And more importantly, it allowed us to add back some of that exposure at much better levels during April.

The second was increasing our government bond exposure.

The market continues to doubt government bonds because yields are so low. But time and again, they proved themselves to be defensive when things go awry.

Our decision to add here generated positive returns at the height of the crisis. But our decision to pull back our exposure since then has allowed us to book some of those gains. It’s just precisely this active asset allocation approach that has driven the strong recovery of this Fund over the last two months.


What is the most supportive environment for the fund?

The fund relies on Australian investment-grade credit as its core income engine. While less defensive than government bonds, it is far better at generating income, which is important in a world where interest rates are going to be glued to the floor for some time.

Also unlike equities, a slow-growth environment is actually quite supportive for investment-grade bonds, because corporates choose balance sheet repair over aggressive expansion, and investors flocked to the asset class in search of yield.

As for emerging markets, this is likely to do well as long as the recovery continues, at whatever pace. Especially so considering the extreme levels to which emerging markets had sold off during the crisis.

And unlike most composites style funds, this fund has the ability to tolerate a much wider range of interest rate scenarios because we can choose to hold no government bond exposure whatsoever, should we feel that a significant rise in interest rates is around the corner.

Most importantly, this fund has the room to top up on income-generating potential, which can take the portfolio’s yield to close to 4%.

This is not to be sniffed at considering that term deposits can’t even pay close to 1%.


Amy Xie Patrick is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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This article has been prepared by Pendal Funds Services Limited (Pendal) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at 17 June 2020. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither Pendal nor any company in the Pendal Group accepts any responsibility or liability for the accuracy or completeness of this information.

Pendal is the responsible entity and issuer of units in Pendal Dynamic Income Fund ARSN: 622 750 734. A Product disclosure statement is available for the Fund (PDS) and can be obtained by calling 1800 813 886 or visiting You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.

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