'Bondification' of equities to stay

Australians need to rethink domestic equities bias and look overseas for deeper markets and better opportunities if they want to capture yield in retirement, Principal Global Investors believe.

With continued volatility of equities and a once-in-a-generation bull market, investors are bouncing between caution and fear as demand for defensive stocks drive the 'bondification' of equities, a commissioned report by Principal Global Investors has found.

The CREATE-Research report, "Pragmatism Presides, Equities and Opportunism Rise", found pragmatism defines investors' approach to equities and the 'bondification' of equities will continue to gain traction.

Principal Global Investors (Australia) chief executive, Grant Forster, said: "Investors are chasing returns, not asset classes, and this may mean a re-thinking of traditional asset allocation models."

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Forster said the traditional thought of investing in 'growth' asset classes when investors are young and investing in more risk-averse assets when retiring or near retirement needs to change.

According to the report, 70 per cent of surveyed respondents believe that over the next three years, pragmatic investors will chase returns, not asset classes and investors expect the highest returns to come from private equity.

With the report focusing on investors' sentiment about the 'cult of equities', in light of the 'lost decade' followed by the bull market of the last three years, 79 per cent of respondents do not believe the cult of equity is dying.

CREATE-Research chief executive, Amin Rajan, said: "Investors understand that future returns from most asset classes will be much lower than in the past, and with bond valuations at historic highs, it's no surprise that equities have been in favour over the past few years."

"This is what is meant by the 'bondification' of equities. Investors know they can't afford to be too risk averse in an environment of artificially suppressed interest rates, so they are hoping for the best of both worlds," he said.