Assessing risk/reward alternatives to term deposits.

Advisers seeking to provide clients with other options to term deposits need to assess alternatives that offer a combination of liquidity, yield, capital stability and reduced risk, and in particular that manage sequencing risk, says Harvey Kalman, EQT head of corporate fiduciary & financial services. EQT acts as responsible entity of the PIMCO EQT Australian Focus Fund.

“While investors might not know what sequencing risk means, those that have retired in the last several years certainly know its impact on their retirement savings and are increasingly looking for help in finding fixed interest investment approaches that can manage this risk, without adding risk elsewhere,” he said.

Commenting on the role of advisers in helping investors in the current low interest environment, PIMCO head of global wealth management in Australia, Peter Dorrian, said, “Transitioning investors successfully from bank term deposits requires a thoughtful approach. While these investors likely want an attractive return, many are also seeking 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.”

As part of its ongoing management process, PIMCO and EQT have recently reviewed the PIMCO EQT Australian Focus Fund to ensure it continues to have the flexibility to anticipate and respond to interest rate movements, and that it meets its stated aims of delivering good performance while protecting investor capital.

In particular, the impacts on investors of sequencing risk were considered – such as how uneven returns affect retirees.

Mr Kalman said that feedback from advisers has shown that there is growing client demand for alternatives to term deposits but uncertainty remains about the best options.

“The key objective of the Australian Focus Fund is to preserve capital and provide higher returns than cash investments, notably term deposits, which is precisely what investors are currently looking for.

“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,” Mr Kalman said.

Robert Mead, head of Australia portfolio management and head of Asia-Pacific credit portfolio management, PIMCO, added that PIMCO is currently seeing strong value in bonds issued by Australian companies in other currencies, such as the US dollar and the Euro.

“After hedging the currency risk, these securities offer very attractive returns. In addition, many State Government bonds offer significantly higher yields than comparable federal government bonds and still have very high credit quality.

“A strategy which offers selective exposure to these securities and other high-quality bond sectors with attractive risk-return characteristics should be a desirable alternative for investors who want stable income,” Mr Mead said.

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The PIMCO offering is the first global bond investment option to be made available on FirstChoice. The investment option, which has a strategy of seeking strong, consistent investment returns while moderating volatility, is available to investors from 11 June 2013.

Peter Dorrian, Head of Global Wealth Management, PIMCO Australia, says: “PIMCO’s inclusion is particularly important as FirstChoice is the pre-eminent platform in Australia. Our presence on the platform will greatly enhance PIMCO’s reach into the important retail market.”

PIMCO’s global bond offerings have an excellent track record in providing steady returns to investors while still offering a conservative approach by taking active steps to minimise volatility.

The PIMCO global bond offering on FirstChoice invests in government, corporate, mortgage and other fixed income securities, and can also invest in non-investment grade fixed interest securities and emerging markets. It is benchmarked against the Barclays Capital Global Aggregate Index hedged into Australian dollars.

PIMCO applies a wide range of diverse strategies that seek to enhance returns and reduce volatility, including duration analysis, credit analysis, relative value analysis, sector allocation and rotation and individual security selection.

The firm emphasises active decision making with a long-term focus and seeks to avoid extreme swings in duration or maturity with a view to creating a steady stream of returns. PIMCO concentrates on two sources of return when assessing potential investments: sector allocation and rotation and bottom up credit analysis of individual bonds and issuers.

PIMCO, which has operated in Australia since 1998, has about AUD35 billion of assets under management locally and USD2.04 trillion globally as of 31 March 2013.

FirstChoice’s AUD60 billion platform offers more than 100 investment options from more than 50 Australian and international investment managers, from specialist boutique managers to leading industry names.

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“For investors, particularly self managed super fund investors holding unallocated cash from super contributions made at financial year end, investing in an actively managed Australian bond fund might be a sensible option for generating income and reducing portfolio volatility,” Mr Dorrian said. “Actively managed bond funds are also flexible compared to term deposits because they can move in and out of debt securities to gain the best returns and there are no break fees.”

PIMCO’s Australian Bond Fund returned 7.48% per annum in the 10 years to June 30, compared to 7.21% per annum for Australian shares (as measured by the S&P/ASX 200 Accumulation Index, which includes dividends).

“The outperformance of the Australian Bond Fund compared to Australian shares is a significant achievement when you consider that bond investors have had a much smoother ride in financial markets than investors in Australian shares,” said Mr Dorrian.

The Australian Bond Fund, and the wider Australian bond market, as measured by the UBS Composite Bond Index, also outperformed Australian shares over five year and three year periods. In the five years to June 30, Australian bonds returned 6.50% per annum versus 2.38% per annum for Australian shares. Over three years, the returns were 8.06% per annum for Australian bonds versus 0.32% per annum for Australian shares.

Regarding global bonds, the pattern was similar, with PIMCO’s Global Bond Fund returning 9.23% per annum over a ten-year period versus -0.14% per annum for global shares (as measured by the MSCI World Accumulation Index, unhedged), with less volatility.

“What is important is that PIMCO’s actively managed bond funds have outperformed share markets and their own benchmarks over the long-term. Bonds diversify portfolios and can provide a differentiated stream of returns in times of market uncertainty and volatility,” Mr Dorrian said.

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