Interest rate announcement a blow for retirees.
The Reserve Bank of Australia’s decision to keep official interest rates on hold for the ninth consecutive month was expected but still came as a blow for income-hungry retirees grappling with falling term deposit rates and volatile equity markets.
The last movement in rates was in August last year when the RBA cut rates to 2.5 per cent. As a result, the yield on some term deposits will effectively be nil after inflation.
Given the cash rate is expected to remain at record low levels for an extended period of time, retirees and other income-focused investors should consider diversified fixed income strategies, according to leading investment research company, van Eyk Research.
van Eyk chief executive Mark Thomas said diversified fixed income funds were an increasingly attractive alternative to term deposits.
He added that skilful, active managers deliver comparable levels of income to equity income funds and real estate investment trusts but with considerably lower volatility.
“The world is still a risky place and bonds still represent a relatively low-risk source of income for retirees and other income-focused investors,” Thomas said.
“An actively-managed diversified fixed income fund can provide both income and capital preservation with the potential for some capital growth. This is important because many people will spend 20 years or so in retirement so they also need some exposure to growth assets to fight inflation and ensure they don’t run out of money.
van Eyk Research has been successfully managing its diversified fixed income strategy since 2008. The group’s investment philosophy is based on the belief that active management and the ability for managers to invest across the entire fixed interest universe is essential to managing the growing risks in bond markets.
van Eyk deputy chief investment officer Rob da Silva said challenging market conditions coupled with the surging number of baby boomers in, or nearing, retirement made it imperative for fund managers and financial advisers to help their clients build robust portfolios which provided a regular stable income
“There are warnings that bonds are too expensive and there may even be a bond bubble, which is why we select active managers who have a proven ability to add value by reducing exposure to certain parts of the bond market when valuations become stretched and increasing exposure when valuations become attractive,” da Silva said.
“The managers we have selected also have a broad mandate to look across all the opportunities in bond markets such as sovereign and corporate bonds, syndicated loans, emerging market debt and other credit opportunities.”
The van Eyk Blueprint Diversified Fixed Income Fund aims to provide a reliable, relatively stable yield over the return on term deposits with a sharp focus on capital preservation.
The Fund invests in seven underlying funds, representing the best ideas of the group’s rigorous investment research and innovative approach to portfolio construction.
About one third of the Fund is allocated to absolute return bond funds, releasing managers to use active management to pursue positive returns regardless of the overall market direction.
The van Eyk Diversified Fixed Income Fund includes Bentham, Macquarie Group and GAM as underlying strategies.