Asset class to combat client fears

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Investors concerned by falling interest rates on cash and bonds but wary of the volatility of the sharemarket should consider the benefits of Absolute Equities, van Eyk Research says.

After the Reserve Bank cut the cash rate to a record low of 2.75%, with the possibility of more rate cuts to come, many investors will be wondering whether to heed the call of some commentators and put more of their money into higher yielding stocks to boost their income.

van Eyk head of manager research and deputy CIO Matthew Olsen said many investors were still wary of the share market but also recognised that current rates on bank deposits and government bonds were not enough to provide them with an adequate income. “We see in our business that many financial advisers and their clients are still particularly sensitive to any further volatility in shares four years after the onset of the global financial crisis,” Olsen said.

van Eyk highlighted that, despite the relatively healthy yields still available on “quality” yield stocks, the ratio of the performance of quality stocks to the “value” end of the Australian market was the highest for 10 years, suggesting there was an elevated risk that the trend will reverse.

Olsen said the Absolute Equities asset class was an alternative worthy of consideration for investors who wanted exposure to the higher returns on offer in equities but at a reduced level of volatility or risk.

Absolute Equities will almost always underperform a strongly rising share market but many investors will find that to be an acceptable trade off because they are significantly less risky than a fully invested or “long-only” position in shares.

Absolute Equities come under the umbrella of “Alternative” investments. van Eyk recommends investors have an exposure to Absolute Equities as part of a well-diversified investment portfolio.