Sponsored Content – American Century Investments
By G. David MacEwen,American Century Investments,
Chief Investment Officer, Fixed Income
November 29, 2011
In this unpredictable, sometimes chaotic world, people are drawn to structure and consistency. We believe that the scheduled, mostly predictable payments of interest and principal from bonds should become increasingly attractive, especially to investors battered by the past decade of equity market volatility. We think this focus on fixed income is particularly appropriate for investors with more capital preservation needs than growth, and shorter-term investment horizons.
For the past decade, two significant “macro” developments have battled each other:
- The aging U.S. population and the growth of retirement investing, with its inherent objectives of providing risk management, income, and capital preservation, as well as capital growth.
- The rollercoaster behavior of investment markets, most notably stocks.
On One Side: An Aging Population with Its Needs
According to the U.S. government’s Administration on Aging, persons 65 years or older represented 12.9% of the U.S. population in 2009 (the latest year for which data is available). By 2030, that percentage is projected to be 19%, and the absolute number of persons in that category will have more than doubled. Because of this large and growing 65+ population, much of the investment market is retirement driven (funded by payments from and contributions on behalf of individuals seeking retirement income and security), creating massive pools of retirement directed capital in the financial markets. Of course, retirement capital doesn’t just come from the 65+ category—younger investors with longer investment time frames are also funding retirement plans and programs.
On the Other: Volatile Markets That Disrupt Retirement Planning
These committed retirement capital pools can serve as a market-stabilizing influence. But these investments also operate under constant threat from economic and market forces, subject to debilitating value changes at inopportune times as investors approach retirement. For example, during the past 12 years, equity investors have experienced severe volatility, including two separate extended market declines in which major indices lost roughly half their value. Many of those who planned to retire in 2003 or 2009 deferred because of deflated equity holdings, which often represented the majority of their retirement capital. Younger investors also altered their plans and behavior.
Focusing More on Fixed Income, Particularly with Shorter Horizons
The stock market declines noticeably affected the attitudes and outlooks of both over- and under-65 investors. As we have discussed in previous pieces (addressing concerns about the depth of future bond demand), investors have generally emerged from the past decade with increasingly risk averse behavior and are more focused on fixed income. Here are a couple of reasons why: High quality bonds typically provide positive returns when held to maturity, and—in the case of high-quality sovereign bonds—often come with government guarantees of payment. You can’t say that about stocks. But we still believe fundamentally sound stocks should play capital growth and diversification roles in most risk/return managed portfolios, particularly those with long-term time horizons. For investors with shorter time horizons, we think the increased focus on fixed income is appropriate. Our fixed income team will be highlighting, in coming months, fixed income strategies that can help address the relative stability and reassurance that investors are seeking in today’s unstable and uncertain investment environment. Stay tuned.
American Century Investment Services, Inc., Distributor
©2011 American Century Proprietary Holdings, Inc. All rights reserved.
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