Tower cautions fixed interest investors

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Tower is advising caution on many of the fixed interest offerings currently in the market in the wake of the Securities Commission raising its concerns.

Tuesday, October 12th 2004, 6:41AM

The company’s chief investment officer and head of fixed interest Tony Hildyard has outlined the risks investors face in the fixed interest area. He also examines the importance of looking beyond these seemingly attractive returns.

Tower is also surveying advisers for their views on the issues.

Hildyard says the key areas of concern from the 30 finance company disclosure documents reviewed included:

• Risk disclosure, principal risks, company activities and the use of rating information.
• Ranking of securities and disclosure about prior claims and early termination rights.
• Advertising and non-compliance with the requirements of the Securities Act.

Hildyard says there are three key messages for fixed interest investors at the moment.

• Credit margins are tight and default risk is increasing so it is not a good time to own/buy lower quality bonds.
• High quality government debt or managed funds offering active management, liquidity and diversification should be preferred.
• If you are worried about return volatility in a managed fund due to rising interest rates or if you expect you will need to sell your bond before maturity, then invest the fixed interest portion of your portfolio in cash, short-term investment grade investments and high quality floating mortgage funds until interest rates have peaked.

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