The typical Australian retail investment portfolio is highly correlated to bank risk and would suffer catastrophic losses in the event of another financial crisis, says Jamieson Coote Bonds.
Speaking to InvestorDaily, Jamieson Coote Bonds executive director and founder Angus Coote said Australian retail investors would get “decimated” if a “sequencing event” were to hit the banking system.
Retail investors often incorrectly assume that hybrid securities and corporate bonds issued by the banks are relatively safe fixed income products, Mr Coote said.
“Everyone knows equity's a risky product, but people assume that because hybrids and corporate bonds are constant payers of coupons that it is going to happen in perpetuity,” he said.
Breaking down the typical portfolio of a SMSF investor, Mr Coote listed assets that are highly correlated: cash in a bank deposit, bank corporate bonds, bank hybrids (which should be thought of as “preferred equity” rather than fixed income), negatively geared property and bank shares.
The one thing that is missing from Australian investors’ portfolios is high-grade government debt, he said.
Jamieson Coote Bonds’ actively managed bond fund aims to provide a ‘true to label’ product for investors who want a truly defensive product to mitigate losses when risk assets are under pressure, Mr Coote said.
“In the really risk averse times, such as 2008, you have a high grade part of your portfolio that can insulate against some of those losses – and indeed take advantage of some of those losses,” he said.
But Jamieson Coote Bonds is fighting an uphill battle in Australia, where bonds have typically been on the periphery for retail investors.
“The bond market in this country was so small for so long that people just don't understand it,” Mr Coote said.
“Whereas if you go offshore it's a bigger and deeper market than the equity market and more prevalent in peoples' portfolios than equities are.”
Jamieson Coote Bonds would not have been able to launch its government bond product 10 years ago, Mr Coote said, but things are different now that Australia has a "deep and liquid bond market".
While it is unlikely that one of the big four Australian banks will get into serious trouble, “accidents can happen”, he said.
“We've obviously got some risks that are bubbling along, and it's comforting to know that APRA and ASIC and the RBA are starting to look at the property market and doing something about it,” Mr Coote said.
“These types of things for risky assets are very detrimental to performance. And one thing that has been underestimated in portfolios is liquidity and protection from these left tail events.
“Everyone's [portfolios] are 80-90 per cent risk in this country. And it's not right.”