The record-low interest rate environment is prompting investors to re-evaluate both the risks and returns of their portfolios.
As interest rates head even lower, Fisher Funds Chief Investment Officer, Frank Jasper, sees bonds becoming riskier, as their future returns are challenged.
Speaking to interest.co.nz, he explained the average maturity, or duration, of the bond market has been rising in recent years as bond issuers - governments and companies - seek to lock in low rates.
Longer maturity bonds expose investors to larger capital losses should interest rates rise, which they may do at some stage. This would see the value of these bonds fall.
Furthermore, investors would have their money tied up in a lower-yielding asset, so would miss out on higher returns elsewhere.
Jasper acknowledged bonds still act as a shock absorber in a portfolio. Typically, weak share prices lead to strong bond returns and vice versa.
But with interest rates already so low, bonds might not be as effective a shock absorber as they were in the past.
Foreign currencies and direct property providing diversity
In this sense, Jasper maintained the asset allocations that have traditionally accompanied “conservative”, “balanced” and “growth” funds aren’t as obvious as they once were.
Conservative portfolios are typically more weighted towards bonds and cash, while growth portfolios are more weighted towards equities and property. Not all bonds have the same risk profile, of course. New Zealand Government Bonds are deemed less risky than some corporate bonds for example.
Jasper said he was looking to other assets to provide necessary diversity in his portfolios, potentially increasing his exposure to foreign currencies and direct property.
Yet he noted the trouble is, there aren’t many assets that have a negative relationship with equities; assets that will increase in value or hold their value if equities fall.
He said considering how to respond to this low interest rate environment was one of the biggest, if not the biggest, issue on his mind.
He maintained that for those with long-enough investment horizons, taking on more investment risk could be a good option.
Bonds issued in NZ tend to have shorter durations, so are less risky
Craigs Investment Partners Head of Private Wealth Research, Mark Lister, favoured weighting portfolios more heavily towards equities.
He was of the view one can’t lose with high-quality equities in the low interest rate environment, which isn’t set to change in the near-term at least.
On the topic Jasper raised around the risk profile of bonds, Lister recognised it wasn’t as much of an issue for New Zealand bonds, which tend to have shorter durations than overseas bonds.
The bonds set to mature in 10, 20, 30 years-plus are the riskiest and will collapse in value if interest rates rise.
If you’ve invested in a bond set to mature in say four years, you don’t have long to wait before you’re able to free up that cash to invest elsewhere, Lister said.
Bonds still have their place
“We’re not giving up on the traditional balanced portfolio approach,” Lister said.
“It’s not enough of a reason to say, ‘Well, we’re going to give up on bonds completely and put all the money into shares.’ Because all that does is introduce a different type of risk.”
Summer KiwiSaver Investment Committee Chairman, Martin Hawes, had a similar view.
He recognised Jasper’s point, noting bond investors often fixate on the risk of the issuer defaulting, rather than also considering the risk of interest rates rising.
However, he said that while a 2% return seems pathetic now, it wasn’t long ago a 4% return seemed weak.
What’s more, he noted bonds are there to provide stability and cover the risk of a long-term deflationary environment, as seen in Japan.
Options limited
Hawes was weary of “alternative assets”, saying he preferred income-producing assets (even if that income is small), and generally stuck to the four fundamental classes - equities, bonds, cash, property.
With private equity for example, he maintained you’d be giving up transparency and liquidity.
Like Jasper, Lister also made the point that finding alternative assets to provide diversity in a portfolio was difficult, with no obvious bargains around.
Lister noted everything looked pretty expensive - private equity, commercial property, gold, etc.
He said investors were going to have to accept “much more modest” returns.
37 Comments
Same high risk for low or zero return applies to term deposits and savings accounts. Combined with Orr and Robberson's refusal to bring forward a bank guarantee.
Your haircut will be Adrian Orr's OBR chainsaw he will happily deploy if his fairly tail world of QE money printing and zero interest rates fails.
We are in a state controlled capitalist market. That statement is ironic!
Only important thing on Orr's mind is saving the debt fueled and keep the market going. The big difference in NZ to the rest of the world is that we only have one real market other than milk production and that's residential houses.
Come March I hope unemployment goes sky high and Orr and Robberson will having nothing left to save the debt fueled and we can have a market correction that is long over due. Its the only hope for a market correction in the current state controlled capitalist market!
I cant give accurate probability estimates nobody can.
However it will depend on a number of factors. Areas of concern are:
Unemployment numbers and mortgage deferrals. Currently all the issues are hidden with previous wage subsidies and mortgage deferrals.
The last stats I saw were approx. 80000 on total deferral and 60000 interest only. So 140,000 not paying their mortgages as they should.
Ordinarily banks would be required to have extra provisions of capital against what are generally called non performing loans. However RBNZ have said they don't have to do this.
With no foreign tourists and no foreign students the eventual job losses could be 200,000 for people directly and indirectly employed in these areas.
Also SME businesses going under that are financed via residential property security being forced to sell.
Other stats I have seen are that at approx 20% decrease in house prices approx 7% are in negative equity and around 23% or 25% this jumps to over 20% in negative equity. That's why I say unemployment will be a big factor as once these home owners loose their jobs and cant even pay principal repayments regardless of interest rates the banks have a real problem. Credit down grades etc and the real problems could start to happen quite quickly.
Further, there is a blanket refusal from Robertson or Orr to bring forward any form of deposit guarantee. Despite the fact the arms of Government are the ones pushing the banks to take on the risk and not be conservatize and therefore exposing deposit holders to an OBR event. So politically they are of the view that it will only impact the 10% who have cash and that would be ok in there minds. There is no other rationale for this.
The negative equity is happening in China and Hong Kong right now https://www.asiatimesfinancial.com/chinese-homeowners-face-negative-equ…
This may sound negative but one must be prepared if you have significant amounts in cash. My reading of the OBR rules is there will not be an offset against mortgages you have with a bank. The cash in each account will be treated separately.
I suggest you diversify across the main trading banks and kiwi bank. Look at putting funds into an account that has a guarantee in the US but you will have an FX risk. US guarantees USD250k per account holder per bank. Since the US Federal Bank Guarantee was bought in my Roosevelt in 1933 its cost the US taxpayer nothing. Australia has AUD250k per bank however there are limitations.
Thx for the detailed reply. I have my NZ TDs split amongst banks but am still a little worried about an OBR. Have USA and Thai accounts so can easily transfer more funds to USA and Thailand so they are insured. My NZ TDs start to mature in about a year so will have to keep my fingers crossed till then. Not much incentive to hold big TD accounts in NZ with almost zero interest rates and no Govt guarantee when I can have them guaranteed elsewhere. My gut feeling is that Govt would do everything to prop up the banks but...Thx again.
You have to chuckle!
Where's all the "Buy Low, Sell High" crowd now? It's all easy in theory until the time arrives to actually do it. And 'Selling High' it the hardest part - whatever it is - because 'there's always just one more quarter of gains' isn't there?
What's Low at the moment? Cash! And what's High? Everything else! (Re-read the article. It's saying exactly that)
Yes, there's the old expression "If you get your timing wrong, your just plain wrong" but at some stage, it's just as important to forget about timing and say "That's enough...."
bw, leader of the seriously confused. Your record of forecasts and predictions this year have been fantastically misleading and couldn't be further from reality. For someone who claims to be an ex-trader I seriously doubt you have any credentials lol. Your solution.. go on the offensive against those who don't share your wayward and back-to-front views.
How many government bonds has the RBNZ purchased above par (negative yield) at it's LSAP (OE) window - what's the $billion tax payer liability when the RBNZ has reached it's $100 billion or more purchase target?.
There is a particular lesson that history regularly teaches, yet the public never actually learns. The lesson is simple. When a) the government – or since 1913 the Federal Reserve – insists on making money cheap by aggressively suppressing interest rates, and b) provided that investors are inclined to speculate – an essential condition that we’ll get to shortly – the combination invariably produces an episode of “irrational exuberance,” often with a subsequent collapse that exerts economic damage far exceeding whatever benefits the depressed interest rates were intended to produce.
Negative yield? You’re soaking in it!
Even for those who learn this lesson, it turns out that applying it is far more challenging than one might expect. Between 2012 and 2017, the Federal Reserve made that situation nearly excruciating, making attention to part b) of the above lesson absolutely critical: “provided that investors are inclined to speculate” – or equivalently – “provided that investors are not so risk-averse that they view low-interest liquidity as a preferred asset in itself.” Easy money doesn’t reliably support stocks when investors are inclined toward risk-aversion. But when they view low-interest cash as an “inferior” asset, look out. Once interest rates hit zero, so does the IQ of Wall Street.Suppose investors are willing to pay $80 today for an expected $100 payment a decade from now. It’s easy enough to calculate that they can expect an average return of just over 2% annually over the coming 10 years. If an investment of similar risk has historically been priced to offer much higher annual returns, one might be tempted to think that the security is overvalued, and that the price will somehow “fall by its own weight.” But if investors are inclined to speculate, and the Fed insists on pouring fuel on the fire, investors may very well drive the price all the way to $100. At that point, sure, the return on that security over the coming decade will be zero. But the short-term outcome, in the rear-view mirror, is that the security will have gained an additional 25%, and speculators will be doing nothing but patting themselves on the back about it.
Worse, speculators might even become willing to pay $110 for the security, in which case passive buy-and-hold investors will be facing average annual returns of -1% annually. Yet at that same moment, they’ll be even more exuberant about it than when their long-term return prospects were zero.
My hope is that it’s clear how all of this works. See, while Wall Street seems excited about the possibility that the Federal Reserve may eventually drive rates to negative levels, passive investors should recognize that the Fed has already engineered negative rates – for the first time in U.S. history, including the 1929 top. Link
I can only think that a small percentage of the population are net positive tax payers after accommodation supplements are handed out to pay rents and mortgages and working for families and emergency benefit grants and unemployment benefits are handed out to the masses our leaders including Cindy, Robberson and Orr etc dont really care.
Just as long as we save the debt fueled and houses keep going up.
Lister noted everything looked pretty expensive - private equity, commercial property, gold, etc.
One of these things is not like the others. Not sure what Lister's basis is to claim gold is 'looking pretty expensive'. Sure, it hit record highs in 2020 but it's not much higher than its previous high back set after the GFC. And with gold's position as a proxy for 'real money', you could argue that it's not about price. It's about wealth preservation.
Don't usual post links to zerohedge but...
https://twitter.com/zerohedge/status/1320095844071317508/photo/1
A repeat of the 1940-1980 period coming up?
‘This period, like the 1930-45 period, is a period in which I think you’d be pretty crazy to hold bonds' - Ray Dalio.
Are fund managers crazy? Although I acknowledge Martin Hawe's point regarding deflation - and having read some of his 'for my money' pieces this year, understands he has concerns around the potential (of deflation).
Do any of these experts (Hawes, Holm, Lister) have a record of recommending Bitcoin? It is the most outstanding asset class of the past 10 years after all. And given that they like to dish out advice, it would have done their audience well. Somehow I don't think that is the case. Holm used to recommend diversified ETFs. Not a bad reco. But times change and probably no more radically than ever before.
Most of these experts are what i like to call "helpers".
The helpers help themselves to fees on your money regardless of your return.
Yes BTC is a speculative gamble.
It is all based around the greater fool theory.
Charlie Munger: Bitcoin is Worthless Rat Poison https://www.youtube.com/watch?v=7LxtHoAHdOY
Yes BTC is a speculative gamble.
It is all based around the greater fool theory.
Charlie Munger: Bitcoin is Worthless Rat Poison https://www.youtube.com/watch?v=7LxtHoAHdOY
OK. You say it is a speculative gamble and Munger says it's rat poison. That's beside the point. Because the data shows that BTC would have been a superb investment over the past 10 years. All I'm asking is why the experts are not recommending it when it is proving to be one of the best hedges against money printing.
Its pure speculation thats why they dont recommend it.
I can show other investments that speculatively have been greater returns but they too are just gambling. You could say those were a hedge against inflation too but they are gambling. E.g Tesla up 11000% on the last 10 years.
BTC doesn't grow or produce anything. Simply relies on the next person be a greater fool and this to me is not investing.
Again to quote some else “Investing is most intelligent when it is most businesslike.”
If you bought BTC in Dec 17 you are still 30% down in NZD today. On 13 March 2020 you would have been 70% down. I am using period bias to over emphasis my points but it has not be smooth sailing.
But you would also have to have the stomach for extreme volatility over the period and most cant do this whether stocks, currency or BTC.
OK. I get your point. Mind you, you point out that BTC is down 30% from its peak. ANZ Bank is 56% down from its peak (which is a key supplier for our beloved housing bubble). Also, if you had dollcar cost averaged monthly into Bitcoin from its peak, you would still be up 231%.
And if you say investing is intelligent when it is most businesslike, that would obviously remove gold as a hedge against inflation. Unless you were investing gold miners. Bit of irony there considering Berkshire Hathaway made a large investment into Barrick this year.
I am invested in gold miners and even in physical gold. The two combined are currently around 5% of my total portfolio (my target allocation of PM used to be around 3%, but I am now hedging my bets a little bit as a result of the imminent US elections).
Anyway, I think that a little bit of exposure to precious metals (say between 2 and 5%) is a sound practice in a well-diversified portfolio.
BTC is something I have never touched, simply because I do not fully understand this asset class, and as a principle I never touch what I am not fully familiar with. I must say that, in a World of out-of-control reserve banks, I can see its appeal, but I struggle somewhat to see it as a form of investment.
BTC is something I have never touched, simply because I do not fully understand this asset class, and as a principle I never touch what I am not fully familiar with. I must say that, in a World of out-of-control reserve banks, I can see its appeal, but I struggle somewhat to see it as a form of investment.
If it is indeed a 'store of value', then it is in essence an 'investment'.
Its not ironic. Investing in a gold miner is not investing gold. In terms of BRK its chicken feed say $500m vs $90 billion in Apple or BSNF Railway bought for $44 billion or the $6 billion invested in 5 Japanese trading houses just announced or many other large subsidiaries or investments.
Also the investment is not Buffett himself but rather one of his two investment managers who independently invest a small fraction of BRK's funds. I invest in BRK myself so follow what they do a lot. They didn't buy as a hedge against inflation. They are sitting USD$130 billion in cash right now.....
Different game completely. BRK is the biggest insurer and reinsurer in the world. So they need likely 30 to 40 billion in cash to cover possible claims and openly say they are financial fortress. That's why its ok to have most of your wealth in the company. Returns wont beat the market anymore but your money is safe with them.
They have $202 billion in US equities now and more in directly owned businesses.
They wont chase yield. They hold that mountain of cash in short term US treasuries and don't trust banks to hold it.
To quote there famous line you don't want to be dependent on the kindness of friends let alone strangers.
Investing in a gold miner is not investing gold.
No it's not. But there is little point investing in Barrick if there is no value in what is produced. About BRK sitting on cash, the supply of USD has increased by 20% in 2020 alone. Not necessarily good for the fund. Furthermore, BRK underperformed the S&P500 last year. Despite the legend of the fund, it may not be the most optimal going forward.
BRK is not a fund. It actually hasn't out performed the S&P500 in the last 10 years. But one must be careful with period bias. If you invested in the S&P500 in 1997 and held for 12 years your return is zero.
Its a fact that no big money manager has out performed the S&P500 in the last 10 years. With large sums its just not possible.
BRK actually owns 6 companies that if they were individually listed would be in the S&P500 separately.
They are an insurance / financial business that spins of huge sums of cash and that cash is the reinvested. They try to buy whole companies if possible.
Re beating the S&P 500 see https://longbets.org/362/ this is Buffets bet on this. Buffett was ahead of his time and the first to test himself against a yard stick of the market index. See Ground Rules book in the pre BRK time in the 1950s and 1960s. The world caught up with him in the 1970s and started doing the same.
They openly state they wont beat the S&P500 but in down periods they may not loose as much. He also openly states that you should have 90% of your wealth in a low cost index fund. Low cost being the important part 0.03% fees like VOO Vanguard
If you have interest watch just 12 minutes here on this topic https://youtu.be/ZZXDbvRGoBs?t=9738
Also a recent article on this https://www.bloombergquint.com/gadfly/money-managers-are-punished-by-a-…
Warren Buffett has substantially underperformed the S&P 500 over the past 10 years
https://www.fool.com/investing/2020/06/23/the-3-biggest-reasons-buffett…
Just because BRK has performed well in the past is no indication of the future. It's a different world that their model may not be suitable for.
I am the one that pointed this out to you above. Did you not understand this? Or have you got blinkers on? As based on your comment above you didn't read what I wrote.
But I dont take Motley Fool seriously. Its just click bait then they ask you to pay for a subscription for their wisdom.
Did you watch the video? Nobody actually out performs the S&P500. Over 10 years the chances are .5%. Over 15 years less.
We are going round in circles but it was you who mentioned above the Berkshire Hathaways model may not be suitable in the new world as it didnt beat the S&P500. Its the highest percentage held stock by the top 68 super investors in the world. Stat from Dataroma / 13F SEC filings so the industry does not share your view!
You can actually buy the S&P 500 via VOO Vanguard for a 0.03% fee guaranteeing you get this return.
You can also buy it for your Kiwisaver via superlife but they somehow manage to take 0.54% for putting your money in the NZX US500 fund and paying it all to Vanguard VOO.
Its actually fees that mean the low cost whole index fund cant be beaten. Watch the video link I sent earlier. Just 12 minutes. Some of the best advice one can get. Anyhow over to you........
Can someone explain why BTC is so super volatile? All I can say is I view BTC as a very speculative investment. It just seems impossible to accurately value. I see blockchain becoming more and more relevant but whether that involves BTC and increases its' value, who knows. Maybe a few % of net worth in a blockchain ETF wouldn't be a bad idea. Go Gamble!
There's still a lot of whales taking profits on exchange. The big buyers are buying otc which is outside of exchanges so doesn't effect the price. There's still fear and greed in the market. And like stocks there's increasingly mum and dad investors at scale on apps trading who have no idea what they're doing.
To a hammer, everything is a nail. https://fortune.com/2020/10/26/jp-morgan-chase-bitcoin-predictions-anal…
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