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Beware high-yielding 'alternatives': Pimco

Beware high-yielding 'alternatives': Pimco

Tim Stewart

In their hunt for higher yielding assets, investors could be unwittingly increasing the volatility and risk within their portfolios, says Pimco.

The risk-free return for investors has fallen to somewhere between zero and 2 per cent, says Pimco Australia head of portfolio management Rob Mead.

In order to receive pre-GFC returns, investors necessarily have to take more risk in their portfolios, Mr Mead said.

"The search for additional risk typically starts in the most obvious places, like listed equities, and then migrates more and more towards off-the-run assets that often have less frequent revaluations and much less price transparency," he said.

Examples of assets like these could be global infrastructure projects, streams of securitised cash flows from royalties, or leases on equipment, Mr Mead said.

Such assets can be illiquid at any particular moment in time, and their true price volatility may be "grossly understated", thereby underestimating their risk-adjusted returns, he said.

"If these high-yielding, off-the-run alternatives start to smell a little too much like 'tulips', then beware of getting caught in a yield-chasing mania," Mr Mead said.

"As interest rates remain lower for even longer, the potential for the yield hunt to drag investors too far away from the underlying fundamentals increases significantly."

With central banks appearing to be nearing the end of their interest rate easing cycles, the "engine that appears to have been driving risky assets skywards" appears to be losing power, Mr Mead said.

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Beware high-yielding 'alternatives': Pimco
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