Worlds Apart

Equity or debt? Most people would probably prefer plenty of the former and none of the latter. Put casually: a fat wallet and no debt.

But what if you have money to invest? In Austria and Germany, many people still have more capital invested in bonds than in stocks. At Gutmann portfolio management, around half of all portfolios have a higher allocation to fixed-income securities. And why not? Building wealth is usually hard work. The volatility of an all-equity portfolio can be difficult to stomach.

A Painful Reversal

When we lend money to governments, institutions, or companies by buying their bonds, we receive interest payments and get our money back at maturity. If a company runs into trouble, our claim ranks ahead of that of shareholders.

That logic offered little comfort in 2022, when bond yields climbed out of the zero and negative interest-rate environment and prices fell. Years later, the impact of that painful reversal is still visible in performance. High inflation made matters worse.

Anyone who invested conservatively in bonds over the past five years has had to absorb far more than a modest performance gap. By now, stocks and bonds are worlds apart. The equity portfolio has gained more than 50%, while bonds are still struggling to stay in positive territory.

Reversing Course Would Make Little Sense

And yet, throwing everything overboard now in favor of stocks would make little sense. The past few years are history. The next five years are what count. Bonds are considerably more attractive today than they were in 2021. As yields have risen, the interest-rate cushion has grown. And money should only be invested in stocks if you are confident you will not need it for the next several years.

Inflation-linked bonds show that real yields in particular have risen. This is true in both the euro area and the United States.

Without getting too deep into the details, this means expected returns after inflation are now attractive.

Staying the Course

At current levels, we once again find bonds attractive. We in the Gutmann Chief Investment Office recently increased the duration of our strategies to lock in today’s yields for longer.

And they say the Gutmann Viewpoint is always about stocks.