Managing risk in a portfolio through fixed interest – PIMCO/EQT

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Advisers seeking to provide clients with other options to term deposits need to assess alternatives that offer a combination of liquidity, yield, capital stability and reduced risk, and in particular that manage sequencing risk, says Harvey Kalman, EQT head of corporate fiduciary & financial services.  EQT acts as responsible entity of the PIMCO EQT Australian Focus Fund.

“While investors might not know what sequencing risk means, those that have retired in the last several years certainly know its impact on their retirement savings and are increasingly looking for help in finding fixed interest investment approaches that can manage this risk, without adding risk elsewhere,” he said.

Commenting on the role of advisers in helping investors in the current low interest environment, PIMCO head of global wealth management in Australia, Peter Dorrian, said, “Transitioning investors successfully from bank term deposits requires a thoughtful approach. While these investors likely want an attractive return, many are also seeking to preserve their capital. Short duration, high-quality fixed interest products which offer yields higher than cash with low volatility can provide an appropriate solution.

As part of its ongoing management process, PIMCO and EQT have recently reviewed the PIMCO EQT Australian Focus Fund to ensure it continues to have the flexibility to anticipate and respond to interest rate movements, and that it meets its stated aims of delivering good performance while protecting investor capital.

In particular, the impacts on investors of sequencing risk were considered – such as how uneven returns affect retirees.

Mr Kalman said that feedback from advisers has shown that there is growing client demand for alternatives to term deposits but uncertainty remains about the best options.

“The key objective of the Australian Focus Fund is to preserve capital and provide higher returns than cash investments, notably term deposits, which is precisely what investors are currently looking for.

“The fund can play a useful defensive role in investor portfolios because PIMCO’s fixed interest team has the discretion to increase the duration of the fund to take advantage of bond price gains when interest rates decline, or lower duration when rates rise,” Mr Kalman said.

Robert Mead, head of Australia portfolio management and head of Asia-Pacific credit portfolio management, PIMCO, added that PIMCO is currently seeing strong value in bonds issued by Australian companies in other currencies, such as the US dollar and the Euro.

“After hedging the currency risk, these securities offer very attractive returns. In addition, many State Government bonds offer significantly higher yields than comparable federal government bonds and still have very high credit quality.

“A strategy which offers selective exposure to these securities and other high-quality bond sectors with attractive risk-return characteristics should be a desirable alternative for investors who want stable income,” Mr Mead said.

The PIMCO EQT Australian Focus Fund is a high-quality, short-term fixed interest strategy that invests in a range of bonds, primarily from Australian issuers. A large portion of the securities in the portfolio are rated triple-A. The Fund has a lower duration than typical core bond funds, which means it is less sensitive to changes in interest rates, and as a result, has lower volatility.

In addition, the fund offers daily liquidity, a major advantage for investors such as retirees who need to be able to draw down their investments. Historically, the Fund has provided returns above inflation: about 4% to 5% above the Consumer Price Index every year since inception. Equity Trustees is the Responsible entity for the fund while PIMCO is the manager.

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For more information please contact:

Harvey Kalman – Phone: 0403 066 749

8 October 2013