Fixed income assets decrease portfolio risk in 2012 - Aberdeen

The Australian bond market will continue to provide investors with insurance against falling equity yields in 2012, but cash is still king when it comes to short-term capital preservation.

That's according to Aberdeen Asset Management head of fixed income Australia Victor Rodriguez who believes that if a client has moved from a 30 per cent allocation of term deposits (TDs) or cash in favour of growth assets, then defence against falling equity yields becomes central to minimising overall portfolio risk.

According to Aberdeen, the MSCI World Index and the ASX200 reported negative returns of -4.7 per cent and -8.7 per cent respectively for the year ending 2011. In contrast, Australian bonds were up 11.4 per cent - almost double that of global bonds (5.9 per cent).

The figures also forecast that over an annualised 20-year period ending December 2010 the volatility is expected to be around 4 per cent, which Rodriguez argues is considerably less than the volatility expected from global equities.

The Australian market is currently in a period of repair and recovery - strong credit and weak equities - and this has given credence to the investment philosophy that it is better to lend to companies instead of owning them, Rodriguez said. 

While the Reserve Bank of Australia's focus on the unemployment rate (currently at 5.2 per cent) and savings rate (sitting at over 10 per cent) are two issues that will have a major impact on the outlook for fixed income in 2012, Rodriguez does not see inflation as a threat - certainly over the next 12 months.

"In an environment where you have this political and monetary uncertainty, you shouldn't lose sight of the insurance you get from a fixed income insurance class, which cash does not provide," Rodriguez said.

According to Russell Investments chief investment strategist for Asia-Pacific Andrew Pease, the best defence against risk is diversification.

"We're finding it very hard to come up with a scenario on a five or ten year view in which government securities outperform share market investments simply because of the run they've had," Pease said.

"In our multi-asset portfolios, the big theme that we've been pursuing over the last three years is to diversify - we want to spread our risk."