Diversification needed in fixed income
Investors in the fixed income market need to make sure they diversify within the sector to avoid running into trouble from asymmetric risk/return characteristics, according to the head of fixed income and credit at Perpetual, Michael Korber.
Speaking at an Australian Institute of Superannuation Trustees seminar in Melbourne, Korber said the key to investing in fixed income was to look after its asymmetric downside risk.
“We always emphasise in fixed income that it has a risk/return characteristic which is very asymmetric. The upside is a pre-defined coupon, which is a few per cent a year, but your downside is your entire capital,” he said.
Diversification was the key to managing that downside risk, Korber said.
“Occasionally you make a wrong decision, so diversification is critical. A lot of the problem with people is that they put a lot of their money into similar securities,” he said.
Diversification in fixed income is more important than in equities, Korber said.
“The measure of getting the benefit of fixed income is to understand risk and to manage risk well in these portfolios,” he said.
Investors should hold at least 100-200 fixed income securities to protect themselves against downside risk, Korber said.
Korber also warned that investors should only invest in the most transparent fixed income funds.
“The moment they start getting too complicated, don’t buy them. Fixed income is about predictability,” he said.
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