Now’s the time to invest in a multi-asset fixed interest fund
Investing your money in the right investment vehicle can protect your capital in trying times
The economic environment remains dominated by the continuing recession in Europe and uncertain growth in the US and emerging markets. In this environment, many investors are overly concerned about the risk of capital loss and opt for cash as the perceived ‘safe’ choice. But this is not the optimal investment decision, says Roshen Harry of Prudential Portfolio Managers. On the other hand, managing the fine balance between risk and inflation, and still receiving adequate yields, requires specialist skills and knowledge that most individual investors don’t have. That is why it’s a good idea to place your money in a fund where this balance is managed for you.
Focusing on cash investments in an uncertain environment negatively impacts your returns
“Investing in cash does not compensate for the general rise in prices (inflation),” explains Roshen. “This means investors end up with a negative return after inflation.” In the light of weak prospects for global growth and the need to promote domestic growth, the Reserve Bank will likely keep cash rates at the current low level of 5.5% throughout 2012.
In fact, nor cash, bonds or property on their own offer adequate yields and stability in the current environment
With these low cash rates, investors are forced to take more risk and generally seek assets that offer higher yields. “But the continuing market volatility doesn’t bode well for investors in ‘risky’ asset classes who don’t have a long enough investment horizon,” Roshen warns.
The table below defines the risk and inflation profiles of cash, bonds and property investments in the current environment. It shows that these three asset classes don’t fulfil investors’ dual objectives of safety and higher yields, and therefore do not offer optimal individual investment solutions.
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Effects of inflation |
Capital risk |
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Cash (money market funds) |
These funds are yielding negative real returns (returns lower than inflation). According to some economists, inflation is set to reach 7% by the end of 2012 – cash does not offer protection against such inflation levels eating away at your money. |
Cash offers capital stability in the sense that you cannot lose the nominal value (before inflation) of your investment. Your money’s purchasing power can however decrease due to the effects of inflation. |
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Fixed bonds |
Bonds offer a regular income is higher than what you would receive from cash investments. that matches inflation. Over the long term, fixed bonds deliver returns in excess of inflation. |
The Prudential valuation model shows that bonds are overvalued. This means that if they were to re-price to what Prudential regards as fair value (not cheap) bond fund investors can lose about 7% in capital, which is quite a significant risk. |
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Inflation-linked bonds |
Returns on inflation-linked bonds are directly linked to inflation. These assets therefore offer good protection in this regard. |
Real yields (the yield over and above inflation) are currently at record low levels. As with fixed bonds, these bonds are vulnerable to rising interest rates, which would result in capital losses. |
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Property |
Property offers an income that matches inflation. Rent increases during a lease period provide some protection against rising inflation. In the very short term however, a burst of high inflation will undermine property valuations. |
According to the Prudential valuation model, property is currently expensive. Property prices are generally correlated with bond price movements, but tend to have a higher price sensitivity to changes in interest rates. This means that when property re-prices to fair value, investors will incur an even bigger capital loss than with bonds. |
Most investors require expert help when it comes to optimal asset allocation
The capital risk and effects of inflation as set out in this table emphasise the complexity of investing in uncertain times. “It’s a daunting prospect to have to manage the risk of capital loss and to protect your investment against the negative effects of inflation,” says Roshen.
To overcome this challenge, investors need help. You can ask a financial adviser, or alternatively invest in a fund where the portfolio managers manage the risks of an uncertain environment for you.
“Because most investors don’t want to worry about how much money to invest in bonds, corporate bonds or money market assets, but also want to remain at the lower end of the risk spectrum, it’s ideal to invest in a fixed interest solution where the risks inherent in each of these asset classes are managed for you,” explains Roshen.
The Prudential Enhanced Income Fund’s offers both higher yields and capital protection
One such solution that takes the stress from investing in uncertain times is the Prudential Enhanced Income Fund. Says Roshen: “The combination and weighting [of these asset classes] is strategic and dynamic in this Fund – we adapt the allocation according to price changes in the market.” By offering a middle ground between risk and inflation, it’s the ideal solution for investors who seek both higher yields and capital protection in the current uncertainty.
Flexible investing is key in uncertain circumstances
Being flexible in the sense of increasing and decreasing exposure to different asset classes is crucial when markets are volatile. This requires specialist skills. “The flexibility of the [Prudential Enhanced Income] Fund to allocate across a broad range of assets allows it to take advantage of mispricing between them,” explains Roshen. “It also benefits from the risk-diversifying properties of a multi-asset approach since different types of assets do not all go up and down together.”
Investing your money in the right place can mean the difference between losses and satisfying yields in tough times
Investing in an economic environment of uncertainty can place investors under a lot of pressure. This necessitates a dynamic and active approach, which in its own right requires the expertise and a suitable investment vehicle. By placing your money in a fixed interest solution you can minimise your capital losses and still get satisfying returns, even when times are hard.
