Risk needs to be better considered when diversifying

Amid the ongoing debate over the appropriate mix of bonds and equities in an investment portfolio, risk should not be overlooked, according to PIMCO head of portfolio management in Australia Robert Mead. 

"It's not just total returns that count, but the level of risk taken to achieve those returns," Mead said.

Referring to Mercer Insights' data on the top 25 performing Australian funds for past five years to December 2011, he said that bonds have generated strong returns with very low risk.

According to PIMCO, Mercer's research revealed that the strong results of bonds were also reflected in the five years to September 2011, which showed that 10 of the top 25 performing funds were fixed interest.

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"This strong performance has been generated at the very same time as many risk assets have generated negative absolute returns accompanied by high levels of volatility," Mead said.

"Recent volatility of bond yields - especially in Europe - has also reinforced the benefits of using a dollar cost averaging strategy to invest in bonds - with investors using regular cash flows over time to diversify and de-risk their overall portfolio."

While Mead conceded that bonds will not always be the dominant driver of portfolio returns that they have been for the past five years, he said the diversification benefits should be a long term consideration.