Advisers should not overlook the risk profile of available investment options in the race for returns, the head of portfolio management at a large, specialist fixed-interest manager said yesterday.
“It’s not just total returns that count but the level of risk taken to achieve those returns,” PIMCO head of portfolio management in Australia Robert Mead said.
“The ongoing debate around the appropriate portfolio mix of bonds and equities for specific investor types must also address risk,” Mead said.
He cited data from financial services consultant Mercer, which gauged funds in terms of their ability to simultaneously deliver strong returns and low risk.
“If we look at the top 25 performing funds offered in Australia for the past five years to December 2011, Mercer Insight data shows that bonds have generated strong returns with very low levels of risk,” he said.
In the five years to September 2011, 10 of top 25 funds were fixed-interest funds, he said.
“This strong performance has been generated at the very same time as many risky assets have generated negative absolute returns accompanied by high levels of volatility,” he said.
“Accordingly, during this period, if investors had combined bonds funds with the more risky asset classes, they would have both increased portfolio return and reduced portfolio volatility.”
He said the recent volatility of bond yields in Europe and elsewhere has reinforced the benefits of dollar-cost averaging, a strategy of using regular cash flow to diversify and squeeze risk out of an investment portfolio.
Mead said bonds would not always be the dominant driver of portfolio returns that they had been over the past five years.
However, he said the addition of bonds to investment portfolios created diversification benefits for portfolios that otherwise too heavily skewed towards equities and other relatively risky assets.
