The rise of a new sector.

Since the start of the pandemic, fixed income has shown its mettle.

Traditionally considered to be an asset that should small only a small (sub 10%) part of a typical retail investors’ portfolio, the recent trends of a wide variety of new fixed income products/categories has opened up the possibilities for those who prefer the risk premium/potential returns offered by many bonds.

Two changes has helped make the — arguably traditionally stuffy — world of fixed income attract the attention of retail investors.

One area that has attracted attention is the rise of strategic bonds. Whereas traditional bond funds would invest in particular maturities/ends of the maturity curve, strategic bond funds offer across a wider range of fixed income instruments.

The excellent performance of several different strategic funds since the beginning of the Covid crisis has illustrated the advantages of such instruments.

The traditional issues with fixed income funds from the perspectives of retail investors and not the pension funds who purchase them to match their liabilities is being caught out in the event of an interest rate hike.

ESG fixed income funds are the new players to the market, building on the once-niche ESG sector — previously known as “ethical investing” — and offering a range of fixed income offerings in areas of benefit to humanity such as social housing, renewable energy and others.

When ascertaining the profile of an ESG fund, investors should be aware that it is an all-encompassing sector with many different perspectives on what the fabled “ESG” means.

Some funds, for example, only focus on “avoiding” unethical companies in areas such as oil and gas, tobacco or the arms trade, generally agreed to be unethical ares for investors to consider.

Such funds have performed well over the last year as their weightings are often disproportionately overweight in technology, a growth area versus legacy sectors such as oil and gas.

However there is another type of ESG fund, the so-called “adventurous” or “active” ESG funds.

Such funds actively seek out investments in areas related to combating climate change, water shortages and other concerns for the human race.

As the investment world moves away from the outdated assumptions investors are only interested in financial returns and not in ESG, fixed income offerings will continue to pour forth to meet this demand.