Investors unaware of fixed-income risks: S&P
Standard & Poor’s (S&P) has claimed the increasing risk in ‘safe’ fixed-income securities could be a disaster waiting to happen and that some investors had no idea of the potential risks.
According to the researcher’s analysis, inflation and its impact on interest rates was the key factor of fixed-interest rate risk.
With the recent interest rate hike in Australia and the US consumer price index at the upper limit of the central bank’s threshold, S&P argued it was difficult to assume inflation and related interest rate risks had diminished.
S&P claimed yields on fixed-interest investments had been declining and had therefore altered the risk/reward profiles of those securities.
The credit rater advised investors to review their exposures to common fixed-income sectors in light of the declining yields, which coupled with heightened risks had changed their risk/return trade-off.
S&P investment consulting head Simon Ibbetson said finding value in a tight fixed-income market required changes in manager selection and portfolio construction methods.
“At S&P we are increasingly advocating allocations to managers with more absolute return-focused approaches, particularly managers who have the ability to take an objective view on valuation,” he said.
Absolute Capital head of sales Paul Harding-Davis said interest rate risk could be significantly minimised by investing in floating rate products, such as mortgages, bank loans and car leases.
While acknowledging the risks associated with fixed-income assets such as structured credit, he claimed investors could stabilise returns through a highly diversified portfolio.
Harding-Davis said structured credit investments allowed investors to access many different risk/return profiles within a portfolio of loans and that the key to success was in understanding these risk profiles.
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