So called “definitional issues” are leading investors to be exposed to more risk than they’re perhaps aware of, according to Bruce Murphy, the Australia and New Zealand director of investment firm Insight Investment.
Murphy specifically points to investors’ continuing fascination with yield – particularly among those reaching retirement and the so-called draw-down phase of their lives – and the resulting distortion in yield-focused portfolios.
“With low interest rates the risk of this whole yield focus is that everyone is going down the credit curve and taking on equity-like risk anyway, potentially at the expense of franking credits,” Murphy explained, during a discussion on the topic of investment risk in Sydney recently.
“There is a distortion in the way people are constructing portfolios which is not healthy in terms of thinking about risk return and sequencing risk,” Murphy said.
Quite often, investors don’t consider that composition of return – whether it’s growth, capital gain, yield – is less important, particularly if you’re paying zero tax in an allocated pension structure, he explained.
Even outside of allocated pensions, risk attributes need to be considered carefully, particularly in the current environment where the yield remains in high demand.
“People get into this income phase and they think they have to get yield… The better way to frame it is that there’s a pure risk return concept that has to be managed, not you need to have a certain component of yield and certain component of growth,” he added.
Because ‘risk’ is a difficult concept to understand and explain, investors often reach for more apparent concepts like ‘growth’ and ‘defensive’, Murphy noted.
“There are definitely some definitional issues. Some people think of infrastructure as a bond-like asset, likewise for property debt. But your underlying exposures can actually be growth oriented when you properly consider risk characteristics,” Murphy continued.
Risk premia and investment labelling will be among the topics discussed at Professional Planner’s upcoming Researcher Forum on December 4.