Interest rates are low. The shares have risen over the past six years. In our investment workshop, we focus on how larger clients’ portfolios can be improved through, in particular, investment in corporate bonds.
Customer Director Claus Richardt Holm has in recent months had numerous meetings with several of the most well-groomed customers. And there is one thing that goes on at all
“Customers almost all say they are afraid that the shares have generally come up too high. And they are eagerly looking to earn a little bit of interest on ordinary bonds, but at the same time, they are reluctant to take profits on both. bonds and shares home in great style. Fortunately, we have some sensible bids for solutions that involve a reorganization of the portfolio against attractive corporate bonds with moderate interest rate sensitivity, “says Claus Richardt Holm.
The solution models are always based on a careful analysis of the customer’s desire for risk and, not least, the investment horizon. But at the same time, it is important that the customer understands the current risks that lie and lurks, and that the customer makes clear how the expected gushes on the financial markets affect the value of the assets.
in the short and long term.
“The wealth management expects a moderate equity return next year at around the historical average of about 8 percent and moderate interest rate increases of about one percentage point for the long-term bonds. But the road to this can easily be a little challenging, so it is important that the analysis is based on an investment horizon of at least five years, “says Claus Richardt Holm.
The interest rate increase is a theme
Interest rate increases are one of the significant long-term issues in the financial markets. At the end of April this year, the 10-year Danish government rate reached a preliminary bottom of about 0.1 percent. Since then, the interest rate has risen quite markedly and is currently around 0.8 percent.
The interest rate increase has had a negative impact on the prices of all types of bonds, partly due to expectations of US interest rate hikes in the autumn and signs of rising inflation in Europe as a result of growing growth derived from the European Central Bank’s money-pumping program.
“Investors who have a fair share of their portfolio in bonds need to actively consider the exposure they have to rising interest rates, which means that they either have to go in full or in part in cash or minimize the portfolio’s sensitivity to prices. Property management recommends the latter to be able to take advantage of ongoing reinvestments at higher interest rates, ”says Claus Richardt Holm.
He adds that interest rate changes are impossible to predict in the short term and that they can come very suddenly in both directions. Instead of trying to time buying and selling, it is, therefore, better to be properly invested in relation to one’s risk profile and investment horizon. It may well lead to some periods of red numbers, but it is not important in relation to the long-term goal of preserving and increasing wealth.
Customer director Claus Richardt Holm says that among the many new customers he is talking to, he often sees a typical portfolio, where there is a relatively large share invested in both short and long-term Danish bonds.
“The customer often calls his” asset-conserving element. “But the point is that the return after cost is close to zero, while the risk of loss is great. That, I do not think, is good advice. I recommend instead an interest-bearing part of the portfolio which gives an expected return of maybe 3-4 percent after costs of slightly rising interest rates, but the risk is slightly larger, but it can be accepted precisely because the assumption is an investment horizon of at least five years, “he says.
He adds that investors with shorter investment horizons of, for example, one to two years alone should invest in individual Danish bonds with a maturity of maximum three years and then accept that the return is close to zero – or invest in Absalon Bonds.
Absalon High Yield Bonds
The investment solution pointed out by Claus Richardt Holm is Absalon High Yield Bonds, which is an investment association department that is managed and advised by the Property Management Group. The fund invests in global corporate bonds, which have an S&P credit rating between BBB and B-. The portfolio is spread over approximately 100 different companies around the world, and these are carefully selected bonds issued by relatively healthy companies with good opportunities for them to pay off their debts. At an unchanged interest rate level, the expected annual return is approximately 5-6 percent.
Corporate bonds are issued primarily in US dollars and, as a rule, we will hedge the currency risk. As something quite special, we also has the opportunity to hedge the interest rate risk, so that the fund alone is exposed to the higher interest rate one gets as an investor to invest in this type of bond. However, this option is not utilized at the time of writing, as the portfolio is placed in bonds with a duration of approximately 3.5, and thus has a relatively low sensitivity to changes in the interest rate level. This means that an interest rate increase of 1 percentage point gives a decrease in the net asset value of approximately 3.5 percent. This sensitivity is precisely the reason why the investment horizon for the overall portfolio is at least five years. The fund is taxed on the capital and dividends each year in April.
Example of conversion
Customer Director Claus Richardt Holm has made a model example based on the experience he has from recent customer meetings. In the original portfolio composition, as shown in the graphics page 15, 40 percent is placed in Danish short and long-term bonds. It can either be through Danish investment associations or directly in selected bonds. In addition, approximately 20 percent is placed in so-called Investment Grade Corporate bonds, which are characterized by having a high credit rating, but a low expected return.
These a total of 60 percent of the portfolio are now replaced by 20 percent Absalon High Yield Bonds and supplemented by 20 percent, which has a relatively low risk and is in line with the investment horizon of three to five years. In addition, we are added, which, through geared investments in secure Danish mortgage bonds, picks up its return on borrowing cheaply at negative interest rates of approximately minus 0.20 percent and invests in higher-yielding mortgage-credit bonds.
Thus, Focus will achieve an expected return of approximately 7-9 percent the next year. The result of the restructuring is that the expected annual return increases quite nicely from previously 4.5 percent to 7.1 percent. The risk increases slightly as a result of increased exposure to equity risk.
But if one looks at “worst case five years – with 95 percent probability”, it has fallen from minus 4.8 to minus 2.0 percent. This means that the risk over at least five years is less than before, while the expected return has increased. This is an example of how investment in corporate bonds together with some of the wealth management’s other investment solutions with low to medium risk can deliver a portfolio with higher quality in the return. Claus Richardt Holm emphasizes that the investment horizon is three to five years in order to better address the inevitable wave paths in the financial markets.
Spread and quality is the password
Claus Richardt Holm has advised hundreds of large private customers over the past 20 years, and the bottom line of the advice is active management and distribution of different types of securities.
“A sound portfolio that can lay the foundation for an attractive long-term wealth increase requires that I, as an advisor, have to be careful in selecting the different investment solutions and asset types. When combined with a commitment from the customer about a sufficiently long investment horizon, it is mine experience that the proposed portfolio lays the foundation for long-term asset preservation and, not least, increase, “he says.
The preparation of an individual wealth analysis and investment advice is only offered to customers who have a total investable capital of more than five million kroner.