Michael Jones is a special guest strategist this week on Alpha Think Tank. He is chairman and chief investment officer at RiverFront Investment Group, an independent registered investment advisory firm based out of Richmond, Virginia. RiverFront provides asset management as well as investment advisory services to a multitude of clients, including high net worth individuals, institutions, pension plans and government entities.
Michael was a standout speaker at ETF.com’s Inside ETFs Europe conference in Amsterdam in early June, where he shared his views on what to expect in fixed income in the U.S. and abroad as the Federal Reserve’s and the ECB’s timing of their respective stimulus programs diverge. Michael recently sat down with ETF.com to revisit those themes and further discuss other nonfixed-income asset classes with attractive yields that exhibit lower volatility than traditional equities.
NOTE: The ETF selections listed at the end of this interview under the "ETF.com Insight" section are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from Michael Jones or RiverFront Investment Group.
ETF.com: With the 30-year bull market in fixed income potentially set to expire, should investors still own fixed income in their portfolios, and how should they own it?
Michael Jones: What people need to recognize with respect to fixed income, at this point in the rate cycle, is wherever interest rates go from here, returns are going to be low. So, do you need fixed income? It depends upon your ability to withstand the volatility that stocks are inevitably going to serve up. If you can't stand that month-to-month volatility, then yes, you have to have fixed income. But you need to recognize the downside.
Firstly: that every dollar you put in fixed income is a dollar that's not going to work very hard for you, no matter where interest rates go. It's going to be low returns. Secondly, the risks are to the upside for fixed income, particularly in the United States. Not so much in Europe, but definitely in the United States—real risks to the upside for interest rates, which means our strategy is to have everything mature under five years, and the overwhelming majority of our portfolio matures within three years.
ETF.com: How do you generate income if that's the case? If you've shortened that far up the curve, where are you looking?
Jones: One thing is to look into your equity portfolio and see where you can create lower downside risk, lower-volatility components of your portfolio strategy so that you can have more equity than you would normally have. Things like MLPs and REITs are very attractively priced based on our Price Matters work. Look for opportunities like that within your equity strategies.
On the bond side, we believe that short-maturity fixed income—high-yield fixed income specifically—represents a real opportunity to increase income without increasing risk as much as the label would suggest.
When you buy a two- or three-year maturing high-yield bond, it gets stamped with single-B because there's a 10-year bond out there that really is a single-B. But in many instances, over the next two to three years, the company has enough cash on its balance sheet, and you can see over the horizon—12, 18, 24 months—things still look pretty good. The risk of a two- or three-year credit is vastly lower than a 10-year, yet they both get the same rating from Moody's and S&P.