Investors need to overcome fear of bond risk premium

The fear of unnecessary risk and a market misconception of bond risk premium may block investors from fully maximising portfolio returns, according to a study by Australian investment manager, QIC.

QIC’s ‘Building a Stronger, Smarter Portfolio with Bond’ red paper said that investors should better understand the key drivers which had the highest impact on the shape of bond markets.

This would include understanding the influence of global political trends, including debates around fiscal spend, the US election, and industry regulation.

Investors should also take a closer look and explore ‘previous market upheavals’, such as the global financial crisis, as case studies for future risk behaviour and how they could apply the knowledge to optimise their portfolio diversification.

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In terms of turning risk into reward, the study stressed that the investors should rather focus on practical advice for different risk premium and “build their own adventure” instead of using “tried-and-tested models”.

What is more, they should decide on their own whether to incorporate or isolate various risk factors while building their portfolios.

QIC’s director, research and strategy – global liquid strategies, Katrina King, said: “Bonds are often considered the quiet achiever in investment portfolios”.

“But they can be made to work so much harder, as part of smarter investment strategies,” King said.

“The key is to overcome excessive fear of bond risk premium, and arm yourself with the tools and knowledge necessary to make better-informed decisions, for healthier outcomes.”