Flexible approach required for fixed income challenges

7 March 2016

Traditional approaches to fixed income will leave Australian investors exposed to interest rate risk, while returns are at their lowest since federation, Henderson Global Investors warns.

Speaking at Henderson's Knowledge Shared investment briefing last week, portfolio manager, Jay Sivapalan, said Australian investors "need to accept" that pre-global financial crisis (GFC) returns on fixed income products including bonds, were a thing of the past.

"Now we are in a low yield environment," he said. "We believe traditional approaches to managing fixed interest are becoming more and more risky and out-dated.

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"Prior to the GFC a rational investor lending money to the Australian Government would have demanded a yield of somewhere between five and six per cent to compensate you for various risks, and to be above cash.

"Post-GFC we think that number is somewhere between three and four per cent, recognising we are in a low-growth and low return environment where cash rates are going to be lower going forward and inflation is going to be somewhat subdued.

"Post the GFC much of the [bond] issuance in our market has been by the government sector, who typically borrow money for longer maturity or duration.

"The average duration of the bond market has risen to about 4.7 years — the highest on record — and this is happening at exactly the point in time when we're at post-federation lows in terms of bond yields at 2.4 per cent.

"So if you're an investor in the market, traditional approaches are giving you more and more interest rate risk at the time when bond yields are at their lowest, and therefore we believe that a more flexible approach is appropriate for the times that we live in."

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