Advantages in diversity
Investors looking for the safety of cash could be missing out on hundreds of dollars of potential returns, according to Putnam Investments director retail business Peter Walsh.
“Based on our research, one sector of fixed interest rarely remains the top investment from year to year,” he said.
“We have found the average difference between the top performing sector of fixed interest and the bottom over a 10-year period is about 24 per cent.”
The biggest performance difference was in 2000 when the difference in returns between the top segment and bottom was 36 per cent.
Putnam looked at the different segments of fixed interest from 1996 to 2007 and found the best returns were almost different every year.
“Every segment finished in the top two in some years and the bottom three positions in other years,” Walsh said.
“For example the high yield bond sector is as likely to finish at the top of the table as at the bottom so it cannot be the sold investment in a fixed interest portfolio.”
The research looked at Australian and global bond returns as well as Australian cash.
Cash has only been the top performer once in the past 10 years, returning 6.77 per cent in 2007.
The rest of the time it hovered in the middle of returns and in 2000 and 2001 it was almost at the bottom of the fixed interest performance table.
“Picking which segment to invest in to deliver the best return might as well be done by tossing a coin,” Walsh said.
“Last year people wanted yield from fixed interest investments and concentrated all their investments in this sector.
“Global high yield funds came bottom of the chart with a minus 7.39 per cent return.”
Walsh said a fixed interest manager has to have some money in every segment because they don’t know which will outperform during the year and which will come bottom.
“The manager needs a broad spread of investments so they are not relying on one segment to deliver the top performance,” he said.
“So just picking cash this year will ignore possible additional performance from global bonds.
“Diversification is the key word to get the benefit of the opportunities that are in the different segments.”
Walsh said looking at fixed interest segments over the long term has shown there are no opportunities to “pick a winner”.
“In 2008 it is going to be no different to previous years where some segments will deliver positive returns, such as global bonds, while segments such as cash may not be king this year.”
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