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January 30, 2015updated 04 Apr 2017 1:47pm

Financial advisors concerned about prospect of rising rates: Fidelity

Many advisors are anticipating a rise in interest rates, and are also focused on how to generate a steady income stream for clients in the current low interest rate environment, according to the Q4 2014 Fidelity Advisor Investment Pulse survey.

By Verdict Staff

Many advisors are anticipating a rise in interest rates, and are also focused on how to generate a steady income stream for clients in the current low interest rate environment, according to the Q4 2014 Fidelity Advisor Investment Pulse survey.

Interest rates took the No. 1 spot during the quarter – up from No. 3 in Q3 2014. In addition to interest rates being top-of-mind, the Q4 survey revealed advisors’ continued focus on market volatility, which took the No. 2 spot.

Fidelity Financial Advisor Solutions president Scott E. Couto said, "The prospect of rising interest rates has been a big area of focus for well over a year. Even in an uncertain interest rate environment, there are some immediate actions advisors may take to help their clients generate income, particularly those clients in retirement."

Couto suggests that advisors look at how fixed income can play a crucial role in their clients’ portfolios, particularly during periods of volatility and continued uncertainty over interest rates.

Three key considerations:

1. Interest rates may settle at lower levels than many predict – The global macro environment remains uncertain and bond yields outside the U.S. remain low.

When examining the fundamentals, there is no extraordinary pressure for interest rates to go up rapidly, so in the long term, rates may settle in at lower levels – and for a longer time – than many predict.

2. Core bond funds – Treasuries, mortgages and investment-grade corporate bonds, the main building blocks of most core bond funds, are some of the only assets with negative correlation to equity returns, thus helping to provide diversification in a portfolio.

Investors’ recent fears of rising interest rates have caused them to shun these core holdings and invest in unconstrained and absolute return bond funds. As a result, investors may be exposing themselves to unintended risks as these strategies have a strong correlation to equity returns, thus limiting their ability to provide diversification.

The U.S. economy is in its mid-cycle phase, which tends to favor equity and high-yield investments, but the economy will eventually move into the late cycle, creating an environment in which credit-intensive bonds historically underperform against core fixed income.

This is why core bond funds can be a good choice for clients’ portfolios – they can provide diversification, offer principal protection and meet an investor’s need for income.

3. Keeping short-term volatility in perspective – Fixed income assets can play an important role in a diversified portfolio, and advisors should put short-term market events in context so their clients can stay invested to participate fully in the market’s long-term upward trend.

Regarding advisors’ concerns over market volatility, Couto suggested looking at the returns of the S&P 500 index since 1969, a period when stocks have experienced bull markets, corrections, bear markets and even crashes.

For those investors who can maintain a long-term investment horizon, equity returns may offer a very attractive way to build wealth.

"Significant market fluctuations occur more often than clients realize, and providing them with the historical context can help. It’s not unusual to have more than one correction in the course of a bull market. By understanding their clients’ goals and risk tolerance, advisors can work to help their clients focus on developing and maintaining a sound investment plan," explained Couto.

Fidelity offers a range of insights to help advisors navigate the market. They include:

– Rate Outlook: Invest for Uncertainty – Investors seem certain that rates are about to jump — such confidence may be unwarranted. Fidelity’s fixed income experts explain why many investors may be overconfident about their ability to predict rate moves.

– Why Bond Investors May Benefit from Actively Managed Mutual Funds and ETFs – Fidelity’s portfolio managers describe how experienced managers of active bond mutual funds and exchange-traded funds (ETFs), drawing on expert research and trading support, can add value by discovering attractive investment opportunities caused by bond market inefficiencies.

– Practical Perspectives on Recent Market Volatility – Fidelity’s asset managers discuss factors that can drive a resurgence in financial market volatility and offer timeless insight for advisors and investors.


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