Fixed Income  

Bonds offer return-free risk not risk-free return

Bonds offer return-free risk not risk-free return

James Spence, managing partner at Cerno Capital, has revealed he has concerns about rigid actuarial models that push investors towards substantially fixed income-only investments.

Mr Spence said task number one in the current environment is to avoid the obvious bubbles and the obvious bubbles for our money is core bond markets, where we think yields are simply not reflecting the right price.

In the lastest FTAdviser video interview, Mr Spence tells Ellie Duncan, deputy features editor of Investment Adviser, that he would recommend that investment be concentrated around certain equity markets.

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Mr Spence said: “The selection of equity markets and the weighting within equity markets is going to be one of the critical decisions in the next period.

“We are multi-asset investors so we will always fly the flag for flexible investment and unconstrained approach, which means operating without investment minimums and for us that currently means a weighting towards certain equity markets and very little in fixed income.

“While traditional actuarial models suggest an investor should gradually move towards fixed income as their retirement date approaches, that decision has to be looked upon quite critically today.”

He added that for the person approaching retirement age, the purchase of an annuity effectively underwrites that income from that point onwards, is a “psychologically understandable decision” but it may not always be the best decision.

Mr Spence said: “We would be particularly concerned about adopting rigid actuarial models that push investors towards substantially fixed income-only investments because in that space we think risks are somewhat understated to the point we describe many of those bond markets as offering a return-free risk rather than a risk-free return.

“There is a logic in retaining some flexibility and perhaps in retaining higher equity levels than would necessarily be suggested by conventional actuarial models.”

emma.hughes@ft.com