At the start of this year, Dutch 10-year government bonds yielded 70 basis points. This sounds like a lot now (the same bonds have been yielding negative since summer), but it was almost a record low at the time. It prompted Optimix, another wealth management firm, to call up its clients and confront them with the inconvenient truth that they were unlikely to continue making returns on their government bond investments, while at the same time being exposed to ever-greater duration risk.
“So we asked our clients whether they wanted us to continue to take the risk in order to scrape a couple of basis points or take a more defensive stance,” explains Jaap Bouma (pictured right), senior portfolio manager at the company. They agreed with his proposal to reduce exposure to fixed income and decrease duration risk. Consequently, Optimix’s portfolios now have an allocation of just 26% to fixed income, and a duration of just two years, the lowest-ever figure.
NNEK, another wealth manager, has made similar moves, says Jan-Willem Tjoonk, its head of investments.
“We also talked to clients with high allocations to fixed income to manage their expectations and evaluate whether these investments were still right for them,” he explains. “We decided to lower our duration to between 3 and 4 years. This approach has cost us performance, but we want to avoid falling into the same trap as in 2008: we try to resist the temptation to search for yield at all costs.”
The ever-lasting bond bull market has also made cash a relatively attractive option, even though interest rates on savings accounts have been cut to almost zero. We have cash, will give us -10-15 bps. At some point this will push us out of cash. but we also try to stay away from risk, so it’s a difficult position.
“We advised our most defensive clients to sell part of their bond portfolio, keeping 80% of their bonds and placing the remainder in their private bank account. On the short term that’s not good for us [Optimix’s business model is an all-in fee, a percentage of total assets managed], but on the long term we will have more satisfied clients,” says Optimix’s Bouma.