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Cash rates undercutting low-risk investments

low-risk investments

The negative portfolio returns caused by the economic impact of the COVID-19 pandemic will continue to affect low-risk assets for the foreseeable future, an international fund manager has said.

Investors can expect ongoing negative real returns on low-risk investments as the coronavirus pandemic continues to undercut their performance, an international fund manager has said.

Fidelity International cross-asset investment specialist Anthony Doyle noted the low cash rates implemented by the Reserve Bank of Australia in an effort to alleviate the economic impact of the COVID-19 pandemic had negated the traditional long-term defensive strategies of many investment portfolios.

“With the cash rate likely to remain at this ultra-low level for a considerable period of time, it has big implications for investors in that, essentially, what central banks are doing by dropping interest rates as low as they are is removing the power of compound interest from cash and defensive assets,” Doyle said.

“So it’s simply a case that the old 60/40 portfolio or the defensive portion of your assets are no longer going to assist you in generating or meeting those long-term investment goals.

“They are likely to generate negative real returns for the foreseeable future.”

Doyle also highlighted the portfolio rebalancing effect taking place across financial markets, noting more investors are being encouraged to invest in high-risk assets.

“[There] is essentially this herding effect that we are seeing in markets where investors are herded into riskier and riskier assets in order to attempt to generate the returns that they once enjoyed from defensive assets,” he explained.

In August, the “2020 Vanguard/Investment Trends SMSF Investor and Planner Report” revealed the majority of trustees had not drastically changed the make-up of their investments in the wake of the effect of the COVID-19 pandemic on markets.

In July, GSFM investment strategist Stephen Miller said investors looking to diversify their portfolios following the COVID-19 pandemic may need to move away from traditionally low-risk assets such as government bonds.

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