Advisors expect more clients will increase asset allocations to fixed income or cash rather than equities in the next 12 months due growing client concerns about asset protection, according to a new survey from Incapital, a securities underwriter.
The survey of 200 advisors serving primarily mass affluent clients with an average age of 55 found that half expect clients will add to bond or cash allocations while 29% expect clients will increase their equity exposure. The sum of both are roughly equivalent to the share of advisors (76%) who report that principal protection is now a priority for clients.
These results are not surprising given the increased volatility in the equity market and rising rates in the bond market, says Paul Mottola, head of capital markets at Incapital.
“The features that bonds provide are particularly appealing right now,” said Mottola in a statement. “Bonds offer predictable income and return of principal at maturity (absent issuer defaults), if bought at par, and the potential for portfolio diversification which may improve clients’ risk-adjusted returns.”
Bond funds and bond ETFs, which offer more diversification than individual bonds, however, do not provide for return of principal because they never mature. In addition, bond ETFs tend to maintain a stable duration – i.e. interest rate sensitivity – which potentially exposes them to more price risk when interest rates rise, according to Mottola. Actively managed bond funds, in contrast, generally have more flexibility to adjust the maturities of holdings, Mottola tells ThinkAdvisor.