A funds management specialist has suggested investors need to adopt a degree of flexibility when constructing the defensive component of their portfolios and building their resilience in the current economic climate.
Speaking at the Australian Shareholders’ Association Qld Investor Summit held on the Gold Coast recently, Schroders Australia multi-asset fund manager Adam Kibble highlighted the need for investors to view allocations to bonds differently than they perhaps had in the past.
“How we build resilience is we find assets that are going to do well when equities are doing poorly, so traditionally that has been [through investing in] bonds. But bonds are less reliable now than they used to be because inflation is higher,” Kibble noted.
Along with the fact the effectiveness of fixed-income offerings has been marginalised due to inflation, he pointed out long-term bonds in particular are less appealing because of other influencing factors.
“Long-term bonds can perform very badly when inflation picks up and then very badly when governments borrow a lot of money,” he explained.
“Governments have been borrowing significant amounts of money, they love spending other people’s money, because they’ve got lots of priorities, whether it’s defence, social security and so forth.”
As such, he revealed how Schroders Australia has taken these elements into account and subsequently changed its approach to fixed income.
“Long-term bonds have been a poor investment recently so we’ve only had short-term bonds in the portfolio,” he said.
Further, he confirmed the manager has resorted to investing in gold in place of long-term fixed-income instruments and identified the return threshold being used if an allocation to certain bonds is to be considered.
“Long-term bonds are now yielding close to 5 per cent for government bonds. We need them to provide a much higher level of yield for us to put them in the portfolio because they are less reliably defensive,” he said.
“So building resilience in our portfolios means we need to be adaptable to the changing market environments.”