Individuals looking to invest in fixed income assets should consider an allocation extending beyond Australian government bonds, according to a specialist fund manager.
“Over time, global government bonds have outperformed Australian government bonds. Why would that be the case? The way I look at it, very simplistically, is that it is very unlikely that the Australian government bond market is going to be the number one or in the top three bond markets in the world every single year,” Colchester Global Investors investment officer Matryn Simpson told smstrusteenews.
Simpson said a good fixed income manager could actually add above-market returns to an investment portfolio and the best way of doing this was to have a global approach to investing in the asset class.
“We would certainly argue that if you had a diversified opportunity set of different countries at different stages in their business cycle, adding alpha is easier than just trying to do it on one curve in one market, which is essentially what you are doing if you just buy Australian bonds.”
He took the case for diversification further, arguing a case for the inclusion of only sovereign bonds in a fixed income portfolio – an investment philosophy Colchester Global Investors employs.
“The reason why we only invest in sovereign bond markets and their related currencies is we want to give investors genuine diversification from risk assets,” he said.
“So by sticking to global sovereigns we’re able to do that.”
He suggested it was prudent practice to use a fixed income manager that invests in actual physical bonds and not derivatives when constructing the underlying portfolio.
“People ask us why do you do that? At times of market stress we believe that if you’re holding the physical bond, there will always be a buyer for them,” he noted.
“So if you think back to when Lehmans went bust, the week after that nobody was ringing their broker saying can you get me some derivatives, they were ringing saying I want government bonds now.
“That means if you need your money back from us at times of market stress, we have a very liquid portfolio ensuring we have no problem whatsoever delivering that to you.”