In addition to non-traditional strategies, Schmitzer is working with emerging market local currency bonds. While these investment-grade sovereign bonds are part of a volatile asset class and currency impact can be material, he said, he sees them as a part of a well-diversified fixed-income allocation.
“We like the non-dollar denomination, which provides currency diversification,” Schmitzer said. “Although we cannot predict where currencies go, we do believe the dollar is at a high level, goes in cycles, and with a decline we will get a return increase.
“Also, the yields are in the 6 percent range while we wait.”
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Eric Mancini, CFP, director of investment research and wealth advisor with the Traphagen Financial Group, also uses emerging market bonds in the form of investment-grade corporate bonds. These are often from places such as China, India and Thailand and may yield 4.5 percent to 5 percent.
He also makes use of other non-traditional bonds, such as:
- Catastrophe bonds, issued by U.S. or international governments, the United Nations, reinsurance or other types of companies to cover insurable extreme natural disasters, such as earthquakes, fires, hurricanes, etc. Interest rates can range from 4 percent to 6 percent.
- Peer-to-peer loans, a type of alternative lending arrangement for individuals and small businesses. Seeing yields of 5 percent to 6 percent, these loans are considered by Mancini as low volatility and not impacted by international rates.
“A combination of these specialized bonds doesn’t increase risk,” Mancini said. “We’ve found them to be a great replacement for traditional bonds because they provide potentially higher return and because traditional bonds are at such a low bar.”
He has noticed an increase in availability and awareness of non-traditional bonds in recent years, especially among registered investment advisors.