• KEY POINTS
• Investors face an asset allocation choice between holding domestic or global fixed income.  Each can play a similar role in a diversified portfolio.
• In the mid 2000s, there was a compelling argument in favour of allocating into global fixed income.  Making this choice worked very well through the 2000s.
• Given the sea change in NZ and global interest rates since the GFC, the influences on this asset allocation choice have moved considerably.  In our opinion, the decision between domestic and global is now evenly balanced.  
• For investors who jettisoned domestic bonds entirely, it is timely to review the potential to have a more balanced fixed income allocation.

A framework for domestic versus global fixed income

Investors in a balanced portfolio have a range of asset classes to allocate between in both domestic and global markets.  These include cash, fixed income, equity, property, real assets and alternatives.  Domestic and global fixed income can play similar roles in a portfolio.  Both provide relatively stable returns and act as a hedge against risky asset classes, performing strongest in conditions where risky asset returns are weakest. 

Given their similar roles, while some investors hold both domestic and global fixed income allocations, others choose to hold just one or the other.  From the mid 2000s, there was a trend in the NZ institutional market of allocating towards global fixed interest.  This decision was driven in part by market conditions in the early 2000s.    

This paper provides an assessment of the factors that determine the choice between global and domestic fixed income, including:

1.            Comparable running yields

2.            Benchmark return characteristics

3.            Ability to generate alpha over benchmarks

READ the full paper here