Retirees at risk of great rotation

A great rotation out of bonds and into equities could land retirees who move out of equities and into bonds in search of income on the wrong end of a big global trade, according to AXA Investment Management (AXA IM) director of Australia and New Zealand, Craig Hurt.

The movement from bonds to equities could have multiple repercussions on investment decision-making, he said.

"For such a move to occur, both market and regulatory conditions would have to support greater appetite for risk," he said.

Fixed income investors needed to ask themselves a number of questions, such as whether other assets would offer greater certainty if bond yields dropped; whether a bond bear market was on the immediate horizon and would generate a period of negative returns for fixed income, and whether this would be through higher interest rates or a re-pricing of credit risk premiums?

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The questions were particularly relevant for retirees, he said.

"Whereas in the accumulation phase there is a focus on real-return growth assets, the investment strategy in the post-retirement world is generally centred on capital protection, inflation protection and yield generation," Hurt said.

"The impact of a great rotation in global markets on the average Australian could be significant if their asset allocation is not given due attention," he said.

Hurt said that although bonds might deliver negative real returns in the medium term, a number of options were still available for fixed income investors in the environment of asset rotation which could reduce portfolio duration, add inflation protection and increase yield.

He said there was a strong argument for getting inflation protection.

"Investors can minimise interest rate risk by limiting the duration of their portfolios or by further replacing interest rate risk for credit risk. There is also a strong argument for seeking inflation protection," he said.