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Diversification Across Asset Classes Misleading


The investment diversification strategy implemented by many SMSF members may not be effective, even when it involves multiple asset classes, leaving room for the inclusion of high-grade bonds to provide a truly defensive portfolio component, a global fund manager has said.

“What I’ve seen certainly, and it’s been backed up by data from the ATO in self-managed super fund returns, is that Australian portfolios tend to be dominated by five key things as a proxy for defence,” Jamieson Cootes Bonds investment research and strategy director Paul Chin told delegates at the Undiscovered Managers Showcase hosted by Evergreen and financialobserver in Sydney last week. “Term deposits and cash tend to be pretty prevalent within people’s portfolios. What about credit? People have been buying credit along the way as a proxy for defence. “Negatively geared property also features quite heavily across portfolios as do shares in the big four banks because of imputation credits and their blue-chip nature.” He also identified bank hybrids as the fifth element commonly present in many SMSF portfolios. The five key components common to many SMSF portfolios show how susceptible they are to financial risk originating from the activities of the major banking institutions, he noted. “There is a quite concentrated bet within positions in these portfolios. I’m not saying this is a bad thing, but what I am saying is that there is an opportunity to better diversify across your portfolio and this is where high-grade bonds can come in and do a job for you.” He pointed out the high-grade bonds he is referring to include government bonds, semi-government or state bonds and supranational bonds, which include those issued by the World Bank or Inter-American Development Bank. “Importantly these investment instruments come from a different risk stack. They are designed to behave differently relative to [term deposits, bank shares, negatively geared properties, bank hybrids and credit],” he said.

By Darin Tyson-Chan

Self Managed Super Magazine

20 November 2017


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