Adviser knowledge gap on maturity risk
Financial planners are not sufficiently aware of the maturity risk of holding fixed income assets, according to research house Morningstar.
“I don’t think understanding of duration - which is interest rate risk - is really there at all,” Morningstar credit analyst Nicholas Yaxley told ifa.
The analyst believes at the “top end of the advisor market” there is “no doubt those guys are on top of it,” but, with the “most basic financial planner” he is unsure if there is an understanding of the “volatility if the yield curve” on bonds with different durations.
This is all the more important as macro economic factors can influence the yield to maturity on a fixed income asset.
“The expectation of growth and inflation is how these things are driven...These are the primary things that people should be concerned about and understanding that the yields on bonds do not go down for ever and the capital prices in turn will not go up forever,” Mr Yaxley explains.
Mr Yaxley points out bonds are also going through a difficult transition with potential changes in the Federal Reserve’s (Fed) monetary and interest rate policy.
The Fed has signalled it will start to “taper” its $85 billion a month asset purchases later this year and may halt it altogether by mid 2014.
“There are number of technical factors out there that have influenced the performance of the securities over the past few years, which includes a lot of the QE [Quantitative Easing] globally...[and it] is very important, especially that retail public understand the pricing mechanics and function of interest rate risks within these securities,” Mr Yaxley stated.
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