© MEDIQ Financial Services - a Corporate Authorised Representative of Synchron AFS Licence No. 243313 for Investment, SMSF and Risk Insurance advice.
July 20th, 2012
In an environment of reducing interest rates there comes a point when a decision needs to be made about the ‘fixed income’ element of a portfolio. Over the last several years term deposits have provided a simple and reasonably attractive return for investors, and have become a Fixed Interest element to a portfolio. However the falling rates have taken the shine off this option. And further it is not a true fixed income asset as no capital appreciation is achieved as rates decline.
Professionally managed balanced funds often have an exposure to fixed income, but the average retail client’s portfolio has little fixed income or held specific types like credit, hybrids and term deposits.
There’s a fear or lack of awareness or understanding of fixed income products in the advice industry, which is unfortunate because they are the building blocks of wealth creation.
While fixed income products have always been the building blocks of a good retirement or savings plan, the role they could play was lost in jargon about complex issues like duration and term structure.
Fixed income managers tend to over-complicate their asset class and equities managers tend to over-simplify their asset class … which means that some advisers find it hard to understand what should be relatively simple concepts of fixed cash flows on fixed dates.
Retail funds included equities as standard with fixed income as optional, whereas the reverse should be true. Ideally one should start at the end of the spectrum where by default you’ve got fixed income in your portfolio and you’re making a conscious decision not to have it in there if you don’t want it.
Fixed income products have been confused and investors burnt using hybrids or credit as pure defensives – which were not their role, investors had to be sold on the asset class’ merits.
For MEDIQ clients, fixed income exposure is important and whilst term deposits do have a role to play, a long term portfolio needs to maintain a true fixed interest component to hedge against falling interest rates which inevitably follow declining asset values and slowing economies.
If you are beginning to feel a little jaded by your declining term deposit rates, contact our office to discuss the alternatives.