Bond specialist raises concerns over recent FMA guidelines

When the FMA released an investor guide encouraging retail investors to consider putting more money into bonds, a few eyebrows were raised. One of the people concerned with the guidelines was Hunter Investments managing director Tony Hildyard.

Hildyard told Good Returns that “There are a lot of risks that we in the industry take for granted because we are managing them everyday. I was a little concerned that the FMA hadn’t really covered them. ”

The lack of discussion of diversification was key for Hildyard who explains that “New Zealand grade A assets only really include the banks, a few councils and a couple of power companies. There isn’t really diversification, there isn’t really opportunity and anyone who just goes and buys one or two bonds, they are either going to win big or lose big.”

For Hildyard, the risks involved in bonds are more complex than the FMA guidelines made out. He claimed that the difference between credit ratings were not clearly addressed. A recent study from financial researcher, S&P Global Ratings, found B rated bonds had an almost 30-times higher chance of defaulting than A rated bonds. On this topic Hildyard says that “to the layman a B sounds pretty good, to a professional anything below BBB is starting to be speculative. You need to know the risks.”

An FMA spokesperson told Good Returns that the guide was meant to provide a resource for retail investors in plain english about an overlooked asset class, stating that “The guide is not intended for investment professionals or financial advisers. It provides retail investors an overview of what bonds are.”

While the FMA spokesperson said that they welcomed discussion generated by their guides, they refuted that they had failed to discuss diversification, pointing to a paragraph on pg. 16 of the report that encourages investors with a significant portion of their portfolio in bonds to consider diversifying.

Hildyard is not claiming that the FMA are factually incorrect, but he is concerned that the way it presents the information could provide trouble for those unfamiliar with bonds. “I just think a little more detail is needed. What is there now could give people a false sense of confidence.”

To remedy this situation Hildyard recommends more collaboration between the FMA and fund managers when releasing reports of this kind. “Any of the fund managers in New Zealand would be happy to help, the FMA should use them as a resource.”

Comments from our readers

On 11 September 2020 at 10:02 am Rob Dowler said:

Rather telling that the FMA bond guide for investors is 28 pages long, and the earliest that the FMA can reference diversification is page 16.

On 11 September 2020 at 11:56 am nzeverydayinvestor said:

Great article!

On 15 September 2020 at 10:55 am JPHale said:

Echo the great article.

Clearly I’m not an investment adviser, though I have had plenty of contact with people in this part of the industry. And on the whole those who work in the fund management side of the business have always been professional and helpful with imparting knowledge and increasing peoples understanding.

A resource often overlooked with the clouded view of ‘they want to sell me their product.’

Nup, couldn’t be farther from the point. The bods who know aren’t the bods in sales, they want people to understand what they do, then much of what they do long term would be better understood and less likely to run for the hills in a crisis.

Bond specialist raises concerns over recent FMA guidelines

Hunter Investments managing director, Tony Hildyard says that the FMA guidelines fail to properly explain the risks associated with the sector.

Friday, September 11th 2020, 6:09AM 3 Comments

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