Listed infrastructure and property funds failed to live up to their safe-haven reputations during the recent market slump, a recent Makao Investments analysis found.
The study from NZ’s newest investment consulting house says the relative underperformance of the two sectors over March and April highlights why investors should not conflate income with low-risk.
“Both listed infrastructure and listed property were widely portrayed as the ‘safer’ equity investments with a high dividend yield. We have even heard some industry participants describe infrastructure stocks as ‘a mix between stocks and bonds’ to underline how safe this sector is supposed to be,” the Makao report says.
“Unfortunately, that did not turn out to be the case over the last few months. While the equity market (MSCI World) dropped significantly, these sectors underperformed the broader market by 10% or more…”
The study says the two listed asset classes may still have a place in portfolios but investors should not assume “that stocks with high dividends are always less risky”.
More broadly, the Makao report says both retail and wholesale investors must dig deeper to understand the risks buried among the growing number of income-oriented strategies on display in NZ.
According to the analysis, nine of the 11 major local fund managers market ‘income’ products, reflecting a high retail demand for yield in a low interest rate environment.
“In the institutional space ‘absolute return bond funds’ are increasingly popular – the industry’s income equivalent for wholesale investors,” Makao says.
But the study says the COVID-19 volatility shock also brought home the link between high yield and risk in fixed income markets.
“… the higher the yield of the index, the bigger the drop in price during the selloff in the last quarter,” the report says. “There is nothing wrong with that as such, higher risk may very well end up generating higher returns over the long-term. But if you just saw the 5.7% cheese, you may have been caught – at least temporarily – in the -25% performance trap.”
Furthermore, Makao debunks another common perception that investors can limit fixed income transaction costs by holding high-yield bonds directly rather than via pooled funds.
“It would be foolish to think that you do not have to trade if you hold individual securities. When bonds mature, the proceeds need to be reinvested, and the mix between shares and bonds will need to be rebalanced over the long-term,” the study says. “In fact, periodic redemptions from your investment portfolio may help to realign your asset allocation back to target weights.”
Former Russell Investments NZ head of institutional, Noah Schiltknecht, founded Makao last year with ex colleague, John Horrell, joining the boutique asset consultancy soon after.