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(December-2004) Flawed risk investment strategies need addressing
The investment strategies of many long-term savers are seriously flawed because not enough thought is being given to the fixed interest component of their portfolio, according to the executive bond manager at Tyndall, Ross Gustafson.
Gustafson told the ASFA annual conference in Adelaide last month that investors simply are not paying enough attention to their fixed interest strategies and that this risks undermining their retirement savings.
“Many investors take the view that they are doing the right thing by having a balanced investment portfolio with a percentage in bonds,” he said. “But they don’t realise what currently makes up the bond component or that the benchmark index is not the ‘traditional and safe mix of commonwealth and semi-government bonds’ it used to be.”
Gustafson said that, as a consequence, the strategy of such investors has been to allocate the bond component as a passive investment and then focus on a more active approach to the growth assets of their portfolio where they see greater returns.
He said this approach has two serious flaws — one affecting the risk to their total portfolio and the other affecting the earnings capacity of the portfolio to deliver superior longer-term earnings for the investor.
Gustafson said the composition of the bond index had changed dramatically in recent years with an extraordinary expansion of the corporate sector relative to the combined Australian government sector.
“About six or seven years ago the corporate sector represented less than six per cent of the benchmark, four years ago it exceeded 20 per cent and now it comprises about 33 per cent,” he said.
“Investors should be aware of the additional risk burdens that this transition has created,” Gustafson said.
He said they needed to understand that the popular composite bond market was developing increased correlation to the equity market price behaviour and was also suffering from borrower concentration issues.
“This means that investors who believe that they have diversified by investing in bonds as well as equities and listed property trusts are not as diversified as they might have thought as they are exposed to the same companies,” he said.
AUTHOR
Mike Taylor
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