'It's a bond massacre' - change ahead for investment portfolios

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Investment managers will need to take a hard look at their investment strategies as markets in New Zealand and abroad start to cool off, especially when it comes to bonds and fixed income investors.

Tuesday, December 14th 2021, 6:00AM 1 Comment

by Matthew Martin

Ben Trollip

Investment experts agree, there are three options fund managers have as interest rates increase and markets cool - take more risks, accept lower returns, or do things differently.

They also agree there is hope, mainly with ESG, impact investments, actively managed funds, infrastructure, venture capital and emerging markets, including China.

According to Melville Jessup Weaver's Ben Trollip, "it's a bond massacre out there at the moment" and there's no real reason for investors to stay in conservative funds.

He says investors could also be looking at moving into catastrophe bonds, using more hedge fund strategies or commodities like gold.

"Maybe we see something in crypto, but there is a long way to go there."

Trollip shared his views during the Financial Services Council's annual conference this week, along with Russell Investment's Matthew Arnold, Noah Schiltknecht from Makao Investments and Mercer's Ronan McCabe.

McCabe says today's investment environment is changing and many investment managers are wondering what will happen in the future, especially for conservative investors and retirees.

He says innovation and diversification will be key and that ESG strategies and climate change demands will become important parts of investment portfolios.

"Climate change is the largest challenge over the next decade...and the world is on a decarbonisation pathway," he says.

Arnold says government bond yields are low and shares are becoming more expensive, especially for tech shares and large capital growth stocks.

"In the last 10 years there was some good growth, but in the next 10 years, it's not looking so good...and will be challenging.

"ESG is just part of investing now...in four or five years time it may seem silly not to have this in mind.

"Infrastructure has great growth potential and in New Zealand and the world, we can see significant spending going on," Arnold says.

McCabe says China is underrepresented in many portfolios considering its size, resources, and bond market so could be an option as long as those investments are actively managed and seen as two markets in one - domestic and external.

Schiltknecht says there's still a place for bonds in portfolios, but the challenge is what will be the alternative when equity markets fall.

"Impact investment might be an area where there will be quite a lot of interest", but says investors may have to compromise in terms of returns.

He says there's also a need for more infrastructure investment and it would be great to see more of that in New Zealand.

Trollip says there will always be geopolitical tensions but the rise of China will be one of the most significant events of our time and will be a risk that should be actively managed.

Tags: Climate Change ESG foreign investment FSC geopolitical

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