Education critical for fixed income market
Explaining the investment opportunities available in the fixed income arena will be key to helping clients generate income in the prevailing low interest world, Nicholas O'Donoghue writes.
Ensuring investors adopt a diversified approach to fixed income will be critical to delivering income going forward, Western Asset Management, client service and marketing executive, Michael Dale believes.
For Dale ensuring advisers are informed about developments in the fixed income arena will be critical to protecting their clients' investments.
"Nowadays there is no investment silver bullet," he said.
"Like Japan, the US and Europe, Australian investors find themselves with low deposit rates and shrinking income opportunities.
"Interestingly even the Reserve Bank of Australia has grappled with the issue of lower yields, acknowledging in various communications that Australia might be faced with the dilemma of structurally lower yields well into the future.
"Only a handful of years ago, investors could rely on low risk investments such as term deposits to provide yields of more than six per cent, but yields have fallen dramatically.
"We expect returns on cash and term deposits to be low for the foreseeable future and it is within this environment where there tends to be a stretch for yield.
"We're witnessing investors chasing yield in equities, hybrids and other illiquid instruments that don't offer the same protection as high quality fixed interest.
"In this context, advisers should ask themselves what they think stretching for yield does to portfolio risk profiles - in the current investment environment, small amounts of portfolio volatility can quickly erode all of their hard work, eliminating long-term portfolio gains.
"In the world of fixed income, a diversified fixed income strategy helps offer investors both attractive real returns and exposure to what are fundamentally sound companies with stable cashflow streams.
"Remember, outside of retirement income, fixed income also importantly acts as a portfolio ballast, providing insurance by mitigating or diversifying the risk of major losses in the riskier part of your portfolio in uncertain economic environments."
With seemingly endless shifting of goalposts in the market, Dale said that investment managers needed to adapt to meet the demands of their clients.
"In this context, education, particularly across the world of bonds, is a key deliverable that will ensure our investors are fully armed to deliver quality advice to their clients," he said.
"Western Asset believes that a key component of our role as an asset manager is to share our intellectual capital and create a forum for information exchange.
"Of equal importance is the opportunity to interact with our clients to directly to understand the challenges that they face, particularly against the complex backdrop of today's fixed-income environment."
Over the next six months, Dale said the fund manager planned to continue to develop its global bonds business in partnership with Legg Mason, to provide options in the fixed income sector for advisers.
"Currently, there are very few 'true to label' global bond options available for financial advisers in Australia," he said.
"Given Western Asset's track record of outperformance in global bonds and the firm's strong investment team, I consider there to be a great opportunity for our firm to provide a strong competitive presence in the wealth management channel."
AUTHOR
Nicholas O'Donoghue
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