(Pictured: Peter Dorrian)
The ‘great rotation’ may not be happening as predicted, but there is no doubt investors are deciding not to rollover their term deposits in the current environment and are moving into higher-yield-paying securities. Equity Trustees and its fund manager partner, PIMCO, are looking to capitalize on the trend.
Equity Trustee last week launched a campaign for the PIMCO EQT ‘Australian Focus Fund’ which aims at filling the gap between TDs and longer-duration bonds or income-producing stocks.
Peter Dorrian, PIMCO head of global wealth management in Australia, said the transitioning of investors out of TDs required a thoughtful approach.
“While these investors likely want an attractive return, many are also looking to preserve their capital. Short duration, high quality fixed interest products which offer yields higher than cash with low volatility can provide an appropriate solution.”
In the revamp of the fund, the manager addressed what is now widely referred to as “sequencing risk”, whereby people nearing retirement may potentially suffer more than others from a big short-term drop in valuations.
Harvey Kalman, EQT’s head of corporate fiduciary and financial services, said that people who have retired in the last several years are well aware of sequencing risk, even though they may not be familiar with the term. He said feedback from advisors had shown that there was growing client demand from alternatives to TDs but uncertainty remained about the best options.
“The fund can play a useful defensive role in investor portfolios because PIMCO’s fixed interest team has the discretion to increase the duration of the fund to take advantage of bond price gains when interest rates decline, or lower duration when rates rise,” he said.
Rob Mead, PIMCO head of portfolio management in Australia, said there was currently “strong value” in Australian corporate bonds issued in other currencies, such as the greenback and euro.
“After hedging the currency risk, these securities offer very attractive returns,” he said. “In addition, many state government bonds offer significantly higher yields than comparable federal government bonds and still have very high credit quality…”
Out of interest, the term ‘great rotation’ was invented by some clever investment bankers at Bank of America Merrill Lynch last year. It predicted a global shift out of sovereign bonds, due to their historically low interest rates, and into shares. The shift did not happen as predicted, but nevertheless is occurring in a different fashion: investors are moving to higher-yield opportunities, such as alternative debt. And stocks are benefitting, too, but volumes remain thin due to global economic concerns.