Fixed Income Dilemma
14 November 2021
The global financial crisis, COVID and bank deposit rates that are often negative in some countries means that the need for diversification of retirement earnings is not a textbook concept.
As part of the process of formulating and regularly reviewing the Self-Managed Super Fund (SMSF) investment strategy, there is a requirement to consider diversification. Diversify how? Share market is booming but most portfolios can't take anymore equities' risk.
SMSFs need to spread their capital across a range of investment types to reduce the risk of being exposed to one or a small number of poorly performing investments.
SMSFs looking for assets that are uncorrelated with equity markets could consider investments such as life settlement funds, which invest in United States life insurance policies.
Bonds offer no respite from low returns
Bonds no longer offer the traditional and desired characteristics of diversification, cash income to beat inflation and providing investors with "Sleep at Night" comfort levels.
Fixed income offers fundamental investors no respite. Government bonds yield near zero, despite the Fed abandoning its inflation targets in favour of job growth. Speculative High Yield bonds offer 5.6%, but with rapidly deteriorating credit risk.
The worst news for bond investors may come from Credit Suisse, whose analysis confirms that, in today's markets, bonds no longer offer diversification from equity risk. Many investors have turned to real estate or real estate debt for fixed income alternatives but there are danger signs here too.
One asset class still providing an attractive risk/return profile is Life Settlements, which continues to offer strong fundamentals, an above average yield, low credit risk, and genuine diversification.
Written By Tony Bremness
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