By guest contributor Kev Toohey, General Manager, Atchison Consultants
With the 35-year secular fall in interest rates seemingly on a plateau and shorter-term cyclical expectations of interest rates being focused upwards, there is a temptation for investors to avoid interest duration in their fixed interest portfolios in the attempt to time the rates cycle.
Interest duration is a measure of the sensitivity of the price of a bond to changes in interest rates. Whilst duration is expressed as a number of years, it allows a shorthand calculation of the expected percentage capital loss or gain from a change in a bond’s yield of +1% or -1% respectively.
Role of Fixed Interest in a portfolio
For most investors, defensive assets seek to provide three attributes for a portfolio:
- A positive level of income,
- Capital preservation, and
- Diversification from equity downside periods, particularly those caused by economic recession and an investor flight to safety.