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SIMON BROWN: I’m chatting now with Tlhoni Komako, Fixed Income portfolio manager at Ashburton Investments. Tlhoni, I appreciate the early morning. You put out a recent note making the point that superior returns often come from taking higher risks. Yet weirdly, over the last year or two, the All Bond Index has beaten equities, outperformed inflation, and truthfully we’ve got to say bonds are generally considered a lower risk than equity. It’s been an interesting time to be involved in fixed income and to be looking to generate income from your investments.
TLHONI KOMAKO: Yes, Simon. That’s so. We think about it as fixed income being quite a good option for achieving those investment goals, especially if one is looking at stability and predictability of income generation, whereas in the article I highlight that equities can be quite volatile. You don’t know what might come.
With the option of diversifying your portfolio with fixed-income instruments you do get overall portfolio risk to reduce a bit. So it helps with capital preservation for those who want to maybe safeguard their principal investment. It helps with risk management, just hedging against other risks in a portfolio such as inflation risk – especially in a time now where we start seeing inflation come to the 5% level – also that liquidity risk that an investor may need.
SIMON BROWN: I take your point on that and [on] the inflation. We are looking at inflation probably around 5% over the next two years. Fixed-income funds, money-market funds, are probably both going to do quite well above that 5%, which again means that there’s still good opportunity for investors to get real return in the fixed-income money-market space.
TLHONI KOMAKO: That’s absolutely true. I think in a world where we are seeing inflation start to come in, if we were saying a few years ago when inflation peaked at around 7.8%, right now in a world where we’re starting to see it come in, we have that low-hanging fruit of having [to] invest in something like you said, money-market funds, traditional fixed-income funds, where you don’t really have to take the risk. You can just say, I’m going to put my money here, sit back and enjoy that real return of 4% to maybe even 2% to 5% – if I give you a range. So it just really depends on the investor’s needs, as I say.
So I think as investors we just have to be clear as to what our goals are. Don’t be too greedy in saying, ‘Hey, I want my superior returns’. But if your goal is to just get something more certain without taking the volatility, you can still achieve that with simple funds like fixed income in the money market.
SIMON BROWN: You make a great point here. You’ve mentioned it twice, ‘the right person’. Now of course that right person is going to be someone in retirement – a retiree needing cash from it – but it might also just be a risk-averse investor, someone who doesn’t like that volatility. It might be someone who’s looking to save a deposit on a house or something like that. It’s not just that clichéd, ‘Well, you’re a retiree, fixed income is for you’. It’s a much wider range. And of course then there’s the classic 60/40 portfolio as well.
TLHONI KOMAKO: That’s so too, yes. Like you say, beside the life stages there are different investor needs and goals. So fixed income, like you say, is not just for the conservative investor who wants to prioritise income streams. It can be for the income-oriented investor just seeking those regular cashflow streams, or even the aggressive growth investor who wants to prioritise capital appreciation over time and is willing to take high levels in the pursuit of high returns.
So sometimes it can be a wealth-preservation investor who has already accumulated significant wealth but is prioritising their assets rather than pursuing an aggressive goal. So that’s why in the fixed-income world we do have those securities and investments that offer stability, liquidity and long-term growth.
SIMON BROWN: And something which you mentioned was a chart you put in which actually quite surprised me. We’ve mentioned volatility here and you talked around the All Share Index, and equity being volatile. That’s the nature of the beast.
The bond index, the All Bond, was surprisingly volatile for [me] as a novice looking at it. But then the traditional sort of income funds were just smooth. That’s part of the ‘sleeping well at night’. I’ve got to say that I suppose I hadn’t thought about it and in hindsight it makes perfect sense – a fixed-income fund is perhaps one of the [least] volatile [ones] outside of just good old-fashioned cash in the bank.
TLHONI KOMAKO: That’s true. Your chart over the long term gets quite smooth, and it can be about timing. Sometimes as an investor, like I showed on the chart, you might want your capital or your investment out during the duration of the investment. So it can be earlier than expected. And [with] that early timing it might be that bonds or even equities are quite low, or they can be high. It can be either way. The thing is, you know that if you invest in a more traditional fixed-income fund the returns are quite smooth. You don’t really stress, you sleep much better at night like you said, and you get the returns that you look for to buy that house or a deposit on something.
SIMON BROWN: Or, as you say, income just for living.
We’ll leave it there. Tlhoni Komako, fixed-income portfolio manager at Ashburton Investments, I appreciate the early morning.
