While some critics say Australian government bonds are unattractive due to their small returns, Fund Manager Chief Investment Officer Charlie Jamieson believes they continue to play a defensive role in diversified portfolios in the next year, following the recent government issue of a record $11 billion in new bonds.
“Australian Government bonds rarely have negative returns; they are a low risk asset class, with investment principle and coupon cash flow guaranteed by the government,” Mr Jamieson explains. “Modern day portfolio theory recognises the critical defensive role bonds play in a diversified portfolio providing unparalleled liquidity, capital stability and government-guaranteed cash flows providing regular income, unlike complex bank risk within hybrid securities,” he continues.
He says that during times where equities are under significant stress, such as a global financial crisis, government bond holdings are a great protection to an investment portfolio, as they behave differently overtime. During the 2008 global financial crisis, Australian government bonds “showed the benefit of negative correlation, with about 20 per cent returns, while equities lost over 40 per cent.”
“Historically, any significant pull-backs have been great times to build an allocation to defensive products such as a portfolio of Australian government bond securities,” Mr Jamieson concludes.
Mr Jamieson urges investors and advisers to question their usual asset allocation and try to diversify their portfolios, and to include equity income, real assets, equities, alternatives and fixed income.
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