It is becoming apparent that investors do not really understand the role of fixed interest in a portfolio and the benefits it brings, says Bill Bovingdon, chief investment officer of Altius Asset Management.
“Indeed, there is increasing evidence that many investors are confused by what fixed interest really means.
“Equating fixed interest with term deposits is not a balanced approach and, from a diversification point of view, is not much better than having no fixed interest investments at all,” Mr Bovingdon said.
He said that fixed interest securities play a crucial defensive role in any well-balanced investment portfolio.
“Fixed interest can provide predictable, regular income and act as a foil against the losses made on equity holdings during an economic downturn.
“However, a poorly constructed defensive allocation will fail in meeting defensive and risk-management objectives in times of market turmoil, such as we have seen in recent years.
“Investors need to do some research to educate themselves about fixed interest investments.
“Advisers should encourage their clients to spend the same sort of time understanding fixed interest as they do equity markets, to ensure they have a basic knowledge of the range of products that make up the fixed interest sector and the benefits and risks associated with each.
“Not all assets that have been labelled fixed income are ‘true to label’, and furthermore, not all bonds are made equal.
“Advisers and their clients need to be aware that some are inherently much more risky than others, and others are just not fit for purpose if the objective is to create a safe, predictable source of income that also diversifies a portfolio’s equity risk,” he said.
Mr Bovingdon said investors and advisers should appreciate the two desirable characteristics of fixed income in a portfolio.
He said they provide:
“The importance of defensive role of bonds cannot be underestimated for all investors, and for some, such as retirees, it is particularly critical.
“In addition, the relative stability of bond returns not only reduces overall portfolio volatility, but also over the medium to long term, bonds are negatively correlated to equity prices which improves the risk return profile of the overall portfolio.
“These are points that investors should understand about fixed income,” he said.
Altius has developed a list of risks that investors should consider for fixed interest investing, as well as a definition of investment products that make up fixed interest (see attached).
Altius Asset Management is a boutique fixed interest asset management business, formed through a joint venture with AUI.
Altius takes a diversified approach to fixed interest funds management, combining both credit and duration strategies, and seeks to optimise returns for investors in all market conditions.
For more information please contact:
Bill Bovingdon – Phone: 02 9112 4701
10 September 2012