Investors using conservatively positioned portfolios for their income requirements face continued challenges in light of widespread speculation that the Reserve Bank could cut interest rates‚ and should consider diversifying to include property and protected equity exposure.
This is according to Ronnie Retief of Novare Investments.
“Given the objective to limit negative returns over shorter periods‚ a portfolio that targets around CPI plus 2 percent typically consists of mainly fixed interest instruments‚” he said.
“During normal rate cycles this is achieved by investing in the money market‚ nominal bonds‚ inflation-linked bonds and various credit instruments. Many investors rely solely on money market funds‚ which invest at the short end of the interest rate curve.”
The investments company said that it had become considerably more challenging to achieve real returns in the current economic environment‚ with cash delivering negative returns as short-term interest rates yielded less than the prevailing inflation rate.
Retief said that while it was not uncommon for interest rates to be low compared to their long term averages‚ what was concerning was the possibility that the situation could continue for longer than in the past due to the magnitude of the financial crisis of 2008/9 that currently persisted in Europe.
The challenge this posed for investors who were drawing income from a portfolio yielding a negative real return‚ was that they would increasingly be drawing down on their capital‚ Retief cautioned.
He identified “a viable alternative” as diversification into a wide range of fixed interest instruments in conjunction with some property and protected equity exposure.
This‚ he added‚ would provide enhanced yield at a volatility level similar to that of a money market portfolio.
“Given the nature of the portfolio as a source of income‚ any exposure to equity should be hedged to ensure that the overall portfolio preserves capital‚ even during adverse markets.”