A defensive investment strategy has become popular in recent years but this approach is challenging in current market conditions, says Implemented Portfolios' chief investment officer.
In past years, investors have focused on minimising risk in their portfolios over chasing returns, IP CIO and dynamic asset allocation strategist Jon Reilly wrote in an article posted on the ASX website.
“For several years now, the investing environment around portfolios has been more about defensive characteristics and increasingly less to do with the returns generated,” Mr Reilly said.
“Although [the cash] rate is the lowest on record, defensive investors have for several years been able to take advantage of historically high margins on safe investments such as term deposits from Australian banks.”
Recently, however, banks have begun to increase their domestic funding sources, causing term deposits to decrease, according to Mr Reilly.
“At the end of 2014, traditionally safe long-term government debt was yielding less than three per cent, and even the extra margin on riskier debt compressed over the course of the year, making the returns unattractive for the risk being assumed by investors,” he said.
In addition, Mr Reilly said a weaker-than-expected GDP in late 2014 led commentators to predict further cuts to interest rates, contradicting previous predictions that rates would stay stable through 2015.
As a result of these trends, defensive strategies are likely to be less profitable than in previous years, Mr Reilly suggested.
“In such a low-return environment, and indeed one in which returns may fall further, it can be increasingly difficult to avoid taking on more risk in your portfolio just to maintain the returns to which you have become accustomed,” he said.
Going forward, he encouraged investors to carefully consider an appropriate asset allocation plan that would protect their portfolio when returns are lower than average.
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