Rise in rates won't see sky fall on bond investors
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The world's first fixed-income ETF manager, Blackrock's global head of fixed income Matthew Tucker, discusses interest rates, technology trends, and how far fixed-income ETF flows have left to run.
The protracted period of low interest rates around the world leads many commentators to call this year--and the one just gone--as the year when rates would start to rise again.
Interest rates are something of an obsession for fixed-income investors, as noted by Tucker and his Australian counterpart, head of iShares Australia, Jon Howie.
Tucker was part of the team that built and launched the world's first fixed-income ETF back in 2002. As something of an authority on the topic, he has also authored a regular blog for BlackRock's clients for several years.
"And I think I've written every year, that this is the year that interest rates are going to go up--in 2014, 2015, 2016, and now 2017," Tucker says.
"I think everyone recognises that, globally, we are in a low level of rates ... there's an expectation that they're going to have to go up at some point, but it's not clear that it's going to be this year.
"The second thing is that not everybody remembers or understands that if you are a long-term investor, with a time horizon of at least five to 10 years, you actually want interest rates to rise, you benefit from this."
If rates are higher, funds start investing in the higher-yield environment, which in turn creates more uplift across the fund universe: "Of course, it depends upon your time horizon. If you've got a short-term time horizon, rising rates can be problematic."
"You should really think about that. If rates are rising, there's a tendency for people to think about the short-term impact ... but actually, you want to be getting into the fixed-income markets [when rates are high] because you're able to participate in these higher rates, which means you're going to be able to generate better long-term returns," Tucker says.
Giving an Australian perspective on fixed-income ETFs, Howie says that in many ways investor ignorance around the global macroeconomic environment is a key reason fund flows in to the vehicles are so high.
"Because it's about efficiency of exposure, it's not just simply about someone's view over a 12-month time period--the ease of accessibility, as opposed to trawling through numerous bonds, or other products like credit default swaps," he says.
Robo-advice and ETFs
In the burgeoning digital investment advice arena, ETFs are increasingly offered to end investors as a means of low-cost, flexible, lower-risk access to markets--including fixed income.
BlackRock in the US has its own robo-advice asset, having acquired FutureAdvisor in mid-2015. Howie says there are currently no plans to bring this to Australian investors.
Howie explains that BlackRock in Australia doesn't target individual investors directly, instead focusing its retail efforts on financial advisers, along with its institutional business. And he says there are no changes on the horizon.
"We serve those individuals through advisers and larger wealth businesses. My personal view is that regulation is forcing those businesses to really look at how they're generating scale in those operations. They need to reduce cost and increase the number of clients they can serve efficiently," he says.
"Whether you call it robo-advice or something else, technology will be an enormous component of that. We really see the ETF as a technology, as a component of that broader technology-based solution to serving those clients, particularly SMSF clients.
"I think the industry has generally struggled to serve the SMSF trustees in an open-market, non-conflicted, low-cost and efficient manner. I think you're now starting to see components of a solution come of age ... to engage the client in a personal advice relationship in a way that's cost-effective."
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Glenn Freeman is Morningstar's senior editor.
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