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Investors Want Higher Yields but Fear Rising Rates: Survey

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Fixed-income investors want to have their cake and eat it, too, a poll shared by Franklin Templeton Investments on Wednesday shows.

According to the survey, many investors (50%) say low yields are their top concern when it comes to investing in fixed income. At the same time, 74% worry about how rising rates will affect their portfolios, and 71% believe rates will be higher in 2016.

“It’s our conviction that we are at the end of a 30-year decline in interest rates,” said Michael Hasenstab, chief investment officer of global bonds for Franklin Templeton’s Fixed Income Group, in a statement.  “We need to prepare for the next decade when interest rates will likely be rising, and we believe an attractive alternative is a portfolio that is actively managed, global and unconstrained.” 

Clearly, investors – 60% of whom have half or more of their investments in fixed income – could benefit from spending more time on their grasp of the dynamics of fixed-income products.

The survey found that 48% of investors polled know that bond prices go down when interest rates go up. Thus, they may not appreciate the fact that if the 10-year Treasury rate rises, many longer-term bond portfolios are likely to drop in value.    

Still, over half of investors surveyed turn to financial advisors as their main source of financial information.

Furthermore, a large majority of investors, 94%, say that risk management is an important factor when choosing a fixed-income manager, and 70% indicate that they are invested in actively managed fixed-income funds.

“Fixed-income investors need to understand that if they choose passive investments such as index funds, they are essentially choosing to follow the herd,” explained Ed Perks, chief investment officer of the Franklin Equity Group, in a press release. 

“That means buying what’s popular and selling what may be only temporarily out of favor, rather than actually evaluating whether issues are overbought or present true bargains,” Perks explained. “There is nobody at the helm looking forward and evaluating, for example, whether a rise in rates is a brief spike or the beginning of a longer-term trend.”

Franklin Templeton’s online fixed-income survey, conducted by Qualtrics, included a sample of 525 U.S. investors 25 and older with $100,000 or more in investable assets.

Franklin Assets

Franklin Templeton’s parent company, Franklin Resources (BEN), said Tuesday that the firm has total assets under management of close to $900 billion as of Oct. 31.

Its AUM grew to $898.4 billion, from $898.0 billion on Sept. 30 and $868.9 billion a year ago. In fixed-income holdings, assets were close to $364 billion as of late October, a slight increase from the prior month and last year. Investors held about 20% of their fixed-income assets in tax-free holdings.

Mixed-asset holdings were almost $159 billion, a nearly 12% jump from a year ago.

Groups like Franklin Templeton are hoping to pick up fixed-income investors in light of fallout from bond guru Bill Gross’ departure from the fixed-income shop PIMCO in late September.

During the last week of October, the PIMCO Total Return Fund was losing about $500 million a day in assets, according to John Hale, director of manager research for Morningstar in North America. Thus, the monthly outflows figure — if such a level of daily redemptions were to continue — could be $10 billion or even as much as $15 billion, Hale says.

Before Gross left the bond shop, outflows were averaging about $3.1 billion a month.  At the very least, according to Morningstar, the redemptions could average or top $3.4 billion a month going forward.

In the five days after Gross resigned (Sept. 26) and joined Janus Capital, outflows topped $170 billion. The Total Return Fund’s asset level is 40% below its mid-2013 peak, according to Morningstar.

Across PIMCO, outflows were $48 billion, a level that Morningstar analysts call “significant but manageable.”

— Check out PIMCO Outflows Painful but Not Deadly: Morningstar on ThinkAdvisor.