David Rey, of Strategi, said rising interest rates were starting to be reflected in lower returns in a number of managed funds and direct bond portfolios.

He said, as rates continued to rise over the next year, that could push some fixed interest investments into capital losses.

Rey said advisers whose clients were highly exposed to New Zealand fixed interest should check their clients’ understanding of their relationship with the adviser business, their clients’ expectations of what the adviser would do to advise them of looming under-performance and how well informed the clients were.

“Did you make low risk investors aware that in a rising interest rate environment, their investment can under-perform the bank and possibly even get a negative return? If you didn’t, then what can you do now to make them better informed?”

Rey said the rising interest rate environment prompted two concerns. “One is that a lot of advisers are using outdated assumptions about what sustainable returns might look like for a balanced portfolio,” he said.

“The other thing is in terms of returns, a lot of retirees are relying on income, we’re in a low yield environment. If advisers are putting large allocations into fixed interest, we have had this situation for a while where you’re running a risk that, looking for yield from fixed interest portfolios, you’re going to find you’re dealing with capital losses when interest rates rise. There are a number of problems there.”

He said it was important that advisers educated clients about the risks of their investments. Some advisers were likely using outdated assumptions and historical returns that would not apply to the future.

“Make sure they understand the returns they received going back 10 or 20 years may not be returns they can look forward to in their retirement years.”
Advisers looking for yield in the stockmarket could find they were overweight in equities, too, Rey said.

“They’re possibly putting clients into a risk profile the client is not really comfortable with. It comes back to the adviser conversation about the level of confidence the client has with various risk factors and what capacity they have to carry the risk factors going forward.”