Investors need to focus on minimising risk and volatility in their portfolio in the current investment environment, according to specialist bond manager, PIMCO.
In an analysis issued this week, the company claimed that in a low growth, low return environment investors need to shift their thinking when it comes to investing for income, making risk management a primary focus and by looking closely at where investments sit in the capital structure.
"With lower return expectations and an increased focus on capital preservation, investors should focus on minimising risk and volatility in their portfolio," PIMCO portfolio specialist, Michael Dale said.
He said that generally, Government guaranteed debt, covered bonds, and senior secured debt carried the highest seniority, while senior unsecured debt and subordinated debt sat lower in the capital structure, followed by hybrids, with equity typically at the bottom of the pecking order.
"The difference is that equity represents an ownership stake, while debt is a legal obligation to be repaid," Dale said.
"Secured debt reduces risk to the investor even further, providing a claim over assets of the corporation." Mr Dale said.
He said that while hybrids were often considered as a substitute for fixed income, PIMCO believes this was not the case, as reflected in recent performance data.
"Hybrid securities actually act more like equity in bear markets, and more like fixed income in bull markets. As a result, they dilute overall portfolio returns, but don’t necessarily reduce risk," Mr Dale said.
"Further, investors are not being properly compensated for the considerable extra risk of non-repayment inherent in hybrid securities; an unsecured note or unsecured bond sits higher in the capital structure, is subject to far less volatility, and therefore should generate a more positive risk adjusted return.
"Simply put, investors today are better off lending at the top of the capital structure than owning at the bottom," Dale said.
