How much risk is your fund manager really taking?
A simple maxim in investing is that to generate a higher return you must take on more risk. This fundamental rule applies across asset classes, from equities through to income-generating assets like bonds. Against a backdrop of declining interest rates, Ken Liow from Realm Investment House says investors should be mindful of how "yield targeting" can expose you to more risk.
“In 2016, you could expect around 2% a year as a fairly safe rate from BBB-rated securities, but today that figure is closer to 1% ... If you want to continue to get that 2%, you’ll have to step right into sub-investment grade credit or some other ‘interesting’ types of instruments.”
This means fund managers can be tempted into riskier behaviours trying to maintain higher portfolio yields. Liow emphasises that now more than ever, investors must know what’s going on in their fixed income portfolio and understand how their manager is achieving returns.
In this short video, Liow provides more detail on yield targeting and some helpful tips on assessing how much risk a fund manager is taking.
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