This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
For the first time in years, bonds are back in vogue and the fixed-income party is back in full swing. But for those left outside the doors wondering whether to go in, we re-examine whether it is a party worth going to. Certainly, rising interest rates have changed the investment playing field. And there have been plenty of knock-on effects in different asset classes everywhere. Indeed, the full effects may yet be felt, which in itself may be reason enough to buy bonds. However, the uncertainty engendered by interest rates rising has led to equities and investment trusts suffering a significant sell-off. For those equities and trusts exposed to the economic cycle, this may make sense, given central banks are intent on engineering an economic slowdown to counter inflation.
As we discussed last week, Alternative Income trusts represent the grey area between equities and bonds. These trusts have many attractive characteristics that set them apart from bonds but also have a relatively low exposure to the economic cycle. Investors who bought these trusts may have originally done so because of the significant yield pick-up over the derisory interest rates available in the era of QE. However, comparing these trusts purely on a yield basis with opportunities elsewhere, particularly fixed income, risks missing the point. We re-examine the attractions of the sector in the context of this new era of higher interest rates.
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