Schroders portfolio manager Mihkel Kase said as cash rates have fallen over the past few years, the income challenge for SMSF investors had intensified.
“With the movement out of cash, investors are potentially making big jump up the risk spectrum to assets that provide a lot of yield but also give you a lot of risk,” Mr Kase explained.
“Some of the assets investors have been buying are actually high risk and actually looked and behaved more like equity during the heights of COVID-19.”
While term deposits were once a staple for SMSFs in terms of their cash and income needs, there is now a big question mark over these products given that the cash rate currently standards at 0.25 of a percentage point and may move lower, he said.
In terms of SMSF investors managing their risk in this environment, Mr Kase said diversification into other assets such as global fixed-income markets will be important.
“Global fixed-income markets are larger than global equity markets in terms of dollar value and they span everything from cash and government bonds through to investment grade credit, hybrids and subordinated [debt],” he said.
“Our approach has been to basically use credit and sovereign bonds to generate some income but overlay that with some currency exposures to help with managing any downside risk.”
Coming into the COVID crisis, Mr Kase said the fund was defensively positioned in terms of cash with around a 30 per cent allocation to cash.
“Our credit exposures were investment grade credit, so we’ve been adding some exposures to Asian credit where yield structures are higher [due to] higher cash rates and bond yields,” he explained.
“We’ve also made allocations into our securitised exposures in the US securitised market and added some European credit exposure.”
Mr Kase said that investors at the moment need to be diversifying across asset classes, picking up some assets that are higher yield but also blending those with lower volatility assets that still provide additional returns.
