Philip Greenheld, Senior Manager, Policy and Governance
At the height of the GFC in 2008, we, just like many other funds, received enquiries from members invested in cash investment options who were experiencing negative daily unit price moves1. They were frustrated about why they were experiencing short-term negative returns from what is meant to be a very defensive asset class. The main reason why cash was experiencing a negative return was the crisis, which originated in credit markets, reflected emerging concern as to whether payment obligations could or would be met.
There was however a secondary, albeit less recognised factor contributing to cash investment options achieving negative daily returns during this period. In short, cash was no longer cash. Since the emergence of securitisation in the mid-90s the types of securities that comprised cash investment options were no longer one and the same (as had traditionally been the case). Cash and bank accepted bills were now joined by mortgage-backed securities and other securitised product to inform returns.
Which brings us to the heading of this blog: fixed interest – what is it good for?
The learning from the GFC for investors was a reminder of the principle that the buyer purchases at his or her own risk – caveat emptor. At a minimum it was an important reminder that investors themselves should confirm their understanding of what it is they’re invested in.
Just like with cash, some investors potentially have a dated view of what fixed interest is. Accordingly, they may be surprised upon investigation to find exactly what types of securities can constitute fixed interest today. The proliferation of debt issuance over the last 20 or so years coupled with the continued search for yield in a low return environment has given rise to a significant increase in the types of fixed interest securities available. These can be structured to be defensive (i.e. traditional) or return-seeking (growth-like) and depending on the particular product, may therefore offer different attributes to your overall portfolio.
This is not to say that different types of fixed interest, defensive or return-seeking, might not have an appropriate role to play in your overall portfolio but rather that you should confirm that the fixed interest you hold is indeed providing the attributes you’re seeking.
There are two high-level indicators of whether the fixed interest exposure you hold is either defensive or return seeking in its profile. The first is the duration or average term to maturity of the holdings and the second is their credit risk profile. The more defensive exposures will tend to run shorter durations and have higher minimum credit rating requirements.
In summary, fixed interest can be very good in providing a number of core attributes to your overall portfolio. Just make sure that you have the exposures that you want.
1In the 2007/8 financial year the QSuper Cash option experienced a number of negative daily unit price moves. Annual returns for the QSuper Cash Investment Option when measured over any full financial year period have been positive. In 2008 the objective of the QSuper Cash option was amended to target a bank bill index and the option was restructured accordingly. All members invested in the QSuper Cash option were notified of this change at the time.
The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only and you should get professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
Senior Manager, Investments
Philip has over 20 years of experience in the finance industry. Prior to joining QSuper in 2006, Philip was the Investment Officer for HCF. In his current role, Philip is responsible for the development of policy and implementation of best practice investment governance. Philip has a Graduate Diploma in Applied Finance and Investment (SIA) and a Master of Applied Finance from Macquarie University.