Exchange-traded funds (ETF) could provide investors with more control over a defensive portfolio when implementing fixed-interest and inflation components, iShares said yesterday.
Investors should therefore rethink their portfolio design to link up three mutually supportive assets to better deal with risk from interest rates, credit and inflation, the company said.
The three assets are inflation-linked bonds, fixed-interest-rate instruments and floating-rate securities.
"You're ultimately delivering control back to the investor when implementing these types of assets in a portfolio and ultimately if people are going to have confidence in the defensive part of a portfolio, the assets that they put in there have to do what they say they're going to do," iShares head of intermediary sales Tom Keenan said.
"Managed funds in this asset class have taken on risks where the end user may not have understood all these risks and therefore they have behaved in a different way.
"ETFs deliver that control when implementing that fixed part and that inflation part of the portfolio. That makes investing easier."
Professional Wealth managing director Doug Turek said inadequately structured defensive portfolios often simply swapped equity risk for interest-rate risk.
"Rather than switching between assets in response to changes in the risk environment, it is more important to imbue portfolios with all-weather defensive resilience," Turek said.
Until recently, Australian retail investors could only access a properly diversified portfolio of bonds through unlisted managed funds, however, the launch of fixed-income ETFs had democratised how investors could access fixed-income securities, Keenan said.
"With the introduction of ETFs, all investors now have access to a simpler, cost-effective and flexible toolkit when seeking to implement a defensive portfolio," he said.
"Having easier access to previously rare ingredients, such as inflation-linked bonds, has really changed the fixed-income landscape."
Inflation-linked bonds provided income that varied with consumer price index changes, which helped preserve the real value of capital, he said.
"As Australia's population ages, we expect trends towards defensive portfolio construction to increase," he said.
