Silent risks hidden in bond markets
An industry expert has cautioned investors to not fall into the trap of buying inferior-quality bonds in a low-yielding environment despite the promises of higher returns.
During a recent Pitcher Partners function, advisory board chairman of Jamieson Coote Bonds Mark Burgess sounded a timely warning for Australian investors as the level of national debt continues to rise.
Mr Burgess said silent risks in debt markets were rising given the growth in poorer-quality assets, which he referred to as “covenant lite”, implying weakness in some of the lenders’ protections.
“The ideal time to get your asset allocation right is right now,” he said. “There are unknown risks inside some assets that some investors often don’t fully understand,” Mr Burgess said.
To mitigate against downside risk, Jamieson Coote Bonds specialist bond manager and co-founder Angus Coote told investors to purchase quality AAA-rated government bonds.
This is because exposure to high-grade sovereign bonds can outperform riskier assets such as equities and high-yield credit during periods of market stress given their negative correlation, he explained.
Mr Burgess agreed that adding high-grade bonds alongside other risky assets in diversified portfolios was a crucial measure to get the balance right between risk and return.
“We have got asset classes that have simply had tailwinds behind them — in private equity, infrastructure and real estate,” he said.
“Every infrastructure manager thinks they’re a genius. I stand here and tell you they’re not.”