Bonds and share income funds provide cash alternatives
Exposure to bonds and share income funds may be useful in providing growth options to clients chiefly concerned with preserving capital and maintaining income, Tyndall Investment Management told an financial adviser briefing last week.
Despite the current focus on risk avoidance, Tyndall's national key account manager Aaron Russell told the briefing it was well known that the majority of clients would not be able to achieve their objectives if they are entirely invested in cash.
He said ditching the term deposits was hard, but both bonds and share income funds provided reasonable alternatives.
Tyndall's head of bonds Roger Bridges said term deposits had a number of shortcomings.
These included a longer and locked-in duration with withdrawal penalties; they were only paid at maturity with no distributions; and there was a reinvestment risk where there was no guarantee of being able to reinvest at the same rate.
"It can be upsetting to see everyone running into a short-term asset with variable returns, whereas bonds offer reinvestment rates," he said.
He said there was an assumption that term deposits were a 'return on capital' decision, but they were actually a 'return of capital' strategy, and it remained important to diversify into assets such as equities and bonds.
Tyndall head of Australian equities Warwick Cumming said that Macquarie Bank data showed dividends currently account for close to 100 per cent of total market return.
"The market returns to the certainty of dividends when economic conditions are uncertain. A dividend-based strategy gives you optionality - it's paying you to wait," he said.
He said equity income products were something of a stepping-stone on the risk-return spectrum in stepping back towards equities.
Investors could start at the low-risk low-reward position of term deposits, and move on to a share income product, which was less risky than conventional share funds.
Cumming said piles of cash and term deposits were a concentrated bet on ongoing recessionary conditions, which is not justified given the strength of the Australian economy and policy conditions.
"It's secure but it's low returning - your clients risk missing high levels of tax effective income [and] capital growth," he said.
"They fail to have the diversity of assets that will allow them to cope with the range of potential economic outcomes that none of us are quite certain which will be delivered - the important thing is to be diversified and to have vehicles that respond to that."
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