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Warning: Investment grade companies aren’t bullet-proof

Bullet, investment, bullet-proof

Just because it’s an investment-grade asset doesn’t mean it’s immune to market movements, a global asset manager has said.

Speaking to Nest Egg, Neuberger Berman global asset manager Vivek Bommi said investors need to take a nuanced approach to their investments and understand that nothing is a guarantee.

“Broadly speaking, just because you own something that's investment grade or highly rated doesn't mean you can't take a loss on it in a short to intermediate timeframe,” he explained.

“A good example is Apple.”

The computer company a few years ago bought a 30-year bond with a coupon around 3 per cent.

“Now that bond is down 10 points. It was down around 15 points because rates moved up and the sensitivity to interest rates for longer debt is just much higher,” Mr Bommi said.

“So think about it. You bought it two years ago, you would think, ‘Oh wow, I'm buying Apple Computer and they're paying me 3 per cent.’ And over two years you've gotten that interest. But your capital is down 10 points.

“You've taken a loss on that despite the fact that Apple's earnings keep rising. I think that's the thing you just have to be aware of; the sensitivity to those securities that have the interest rates.”

He said fixed income tends to have a lower volatility than equities and so is generally how investors access stability. Nevertheless, if an investor has half their portfolio in fixed income, they need to diversify further within asset classes.

“If you said 'I'm only going to buy investment grade bonds in that 50 per cent', [you should know that] this year investment grade bonds are down almost 2.5 per cent, so you want something always counteracting that,” Mr Bommi said.

Warning: Investment grade companies aren’t bullet-proof
Bullet, investment, bullet-proof
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