Avoid getting caught out
Credit failures within Australia’s investment landscape are likely to continue meaning financial planners must incorporate credit risk analysis in their advice, warns Farrelly’s Investment Strategy principal Tim Farrelly.
Speaking on the recent credit failures of BasisCapital, Westpoint and Bridgecorp, the asset allocation consultant believes planners can expect “a whole lot more as time goes on”.
“For a number of years planners here have been using more and more fixed interest securities with credit risk attached because you get higher returns, and they have had very few credit failures,” Farrelly said.
“[But], we are now starting to see credit failures coming through.”
Farrelly said instead of avoiding these types of securities altogether, planners should put processes in place to help avoid credit failures.
“By all means invest in securities with credit risk attached to it but you have got to think very carefully about how you are going to avoid credit disasters,” he said.
“When you talk to people they have one of five broad ways of doing it . . . but the one that I think is [the most sensible] is take risks but be very careful how you manage them.
“The proposal I put around management is putting in place formal processes which limit the amount you use for any one investment.
“It varies for every issue. If, for example, you were investing in something that if it went sour you would lose all your money then it’s a matter of looking at your clients and saying ‘how much can I afford to lose in one security for one client?’”
Farrelly will be presenting on this topic at the sixth annual PortfolioConstruction Conference to be held in Sydney on August 15 and 16.
The conference, a two-day program of 31 sessions, aims to present debate on contemporary and emerging portfolio construction issues for professionals involved in the design, building or management of investment portfolios.
For more information visit http://www.portfolioconstruction.com.au.
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