Investors losing money in ‘safe haven’ funds
SO-CALLED safe investments are losing Australian investors money, and their weakness is tipped to worsen.
Fixed interest funds – popular in superannuation and among conservative investors and retirees – have dropped up to 4 per cent in value this year despite being used by many as a safe haven.
The poor performance reflects volatile bond markets that have seen long-term interest rates climb sharply, which reduces the capital value of existing bonds.
It has created an unusual situation where low-risk capital stable funds, which can comprise up to 45 per cent fixed interest, could be among the worst investment performers of 2021. About $400bn is held in fixed interest investments in industry, retail and public sector super funds, according to data from regulator APRA, and older investors and retirees own the most.
AMP Capital head of investment strategy Shane Oliver said “conservative investors tend to have a great
er exposure to it” and some might consider switching money from bond funds to cash despite cash’s near-zero interest payments.
“When bond yields go up, bond values go down, and people can suffer a capital loss when that happens,” he said.
Dr Oliver said 10-year Australian government bond rates had climbed from 0.6 per cent to 1.8 per cent since 2020, part of a global rise in bond yields as the world emerged from the worst of the Covid economic crunch and markets focused on future interest rate rises.
Data from Morningstar.com.au shows total returns from several fixed interest funds were between negative 2 and negative 4 per cent for the year to September 30, and more falls have occurred in recent weeks.
“Most bond funds will have lost money over the last 12 months,” Dr Oliver said.
Interest rates remain historically low and future rate rises will put more pressure on bond values, so cash may be the only choice for people who don’t want negative returns.
“Cash is king,” Dr Oliver said. “You are losing money in real terms but the capital value won’t go lower like bonds.”
Share dividends are another income alternative but share prices can fall hard, as they did in 2008 and 2009 when they plunged 55 per cent.
IG market analyst Kyle Rodda said bond funds were underperforming because of inflation pressures and higher interest rates.
“All the risks seem steered at the moment to interest rates being increased quite aggressively across the globe in the next 18 to 24 months,” he said.
“As a result, bond prices are going to fall. People invest in bonds as a safe haven – it’s a scary situation … and a growing dilemma for money managers across the globe.”