In the environment of low interest rates, Gary Peart, chief executive officer of Mayberry Investment Limited, is prodding investors to focus on capital preservation rather than yields.
Peart said that since most sovereigns are operating with a low interest-rate regime, building portfolios that can yield a high return is proving to be increasingly difficult.
The scenario is unlikely to change immediately given that central banks around the world appear inclined to keep policy rates at current levels, he said, at the latest Mayberry Investor Forum held last Wednesday.
Here at home, nominal returns on some fixed income investment might seem attractive for some investors, Peart cautioned, saying investors should pay more attention to their real returns.
"What we are seeing is that with the Bank of Jamaica 30- day CD rate at six percent and projected inflation at 10 to 12 per cent, you will see that the real interest rate is negative and you have not even taken into consideration the taxes yet," he said.
"Fixed-income investors are faced with two choices: move further out on the yield curve or accept a lower yield."
He explained that shorter, tenor investment, which is less risky for investors, offers a lower interest rate, unlike the longer-tenor bonds.
"So if you are to get better return on your investment, we suggest that you go further out on the yield curve. Maybe not as far as 30 years but about in the 3 to 5-year region," he said.
Build diverse portfolio
The solution for money market investors hunting for attractive yields, he suggests, is to build a diverse portfolio.
"The situation is simple - step out of cash and build a portfolio to include options outside of the money market," Peart urged.
"Focus on the preservation of principal - while we are in search of higher yields, we need to ensure that you don't go and find yield and lose your principal in the process; focus on high liquidity - whatever bonds you invest in, you should already have a ready secondary market in mind because in the event of any changes in your life, you will be able to sell them and get out of those investments as quickly as you got into them," he said.
Additionally, he suggested that investors try to construct a portfolio that includes stocks "that have strong dividend payments" and others that offer capital appreciation.
He also urged investors to use the skills and expertise of portfolio managers and specialists, saying they often do not have the time to do proper credit analysis by themselves (and) to look at various bonds to evaluate if they will remain good investments over time.
"The speed at which things change nowadays, if you are not focusing each day on what is happening, you may not realise that your investment is going bad after a week passes," he warned.