INSIGHT
Walking the risk curve
THE DELICATE BALANCE OF YIELD AND RISK
Choosing and understanding the right level of risk for the desired return is a complex task .
Margaret Taylor and Matthew Driskill
I ncome investors will almost always feel more at home in a low-risk environment . Favoured by those approaching or already in retirement , income funds ’ main purpose is to preserve capital while also providing a reliable source of income .
However , with 10-year US government treasuries currently yielding 1.7 per cent while similarly dated bonds offered by Germany , the UK and France are yielding 0.2 per cent , 1.4 % and 0.6 % respectively , reliable income returns are becoming ever harder to come by .
Add in the fact that investors have been piling into utilities and banks in the hope of receiving relatively safe dividends - driving prices up and yields down in the process - and the quest for income begins to appear a futile one .
The answer seems simple – take on
Margaret Taylor Contributing Editor , Fund Selector Asia
Matthew Driskill Contributing Editor , Fund Selector Asia a higher degree of risk and the higher returns will come with it .
Diversifying into assets such as property could hold the answer for income seekers that are not willing to take a bet on the junkier end of the bond market , with property yields generally holding up across the board . However , credit-risk ’ s loss is liquidity risk ’ s gain , with the inability to sell out of bricks and mortar with any kind of speed dictating that the asset class forms only a small part of any one portfolio .
Some investors may find themselves holding high-yield paper by default , with stocks in the oil and gas sector in particular seeing yields shoot up as a
3 Year Equity vs Property vs Fixed Interest
result of share prices tanking along with the oil price . While some investors will be happy to take advantage of low prices to move into these stocks , ongoing oilprice volatility and the ever – present threat of bankruptcy could ultimately prove to be a risk too far .
“ There are lots of names in Asian oil and gas that are trading at distressed levels without them being declared insolvent ,” says Clifford Lau , head of Columbia Threadneedle ’ s Asia fixed income team and manager of the Threadneedle Flexible Asia Bond fund . “ They ’ re small oil operators that are now trading at 30 cents to the dollar but are continuing to pay the coupon . They ’ re at risk but for nonbankrupt names trading at that level it ’ s considered very cheap so there could be a potential upside opportunity .”
On the government side , it is no surprise that the 10-year bonds offering the highest yields come from the likes of Brazil ( 6.8 %) and Greece ( 10.5 %), where political and economic factors mean the paper is of low credit quality . At a time when there is little reward to be had from buying US treasuries or German bunds , it may be worth dabbling in these lower-rated bonds , but the downside is that the capital used to access the income could be put at risk in the process .
Emotional income investors need to understand , however , that an excessive focus on fluctuations in underlying capital value , may prevent them from reaping the income they desire . The secret to success in such an environment will be exercising both patience and vigilance and not giving in to the temptation of selling quality income assets simply because of noise in the marketplace . FSA
www . fundselectoraisa . com Fund Selector Asia Guide to the Art of Income Investing March 2016 5
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Sector : HKM Equity International TR in HK Sector : HKM Fixed Int Global TR in HK Sector : HKM Property TR