Sovereign risk is here to stay, says Russell
Active management strategies will be vital
AUCKLAND - 3 May, 2010: Leading global pensions adviser Russell Investments is recommending active management strategies for sovereign debt investments in response to the increased risk associated with many foreign government bonds.
The advice comes on the back of ratings agencies' downgrade of Greece's long term debt, the spotlight swinging to countries like Portugal and Spain and warnings about the risk of contagion.
A new Russell Australasian forum paper outlines reasons why sovereign debt has become riskier.
Alister Van der Maas, Russell Investments' head of consulting in New Zealand, says the Russell research concludes that within diversified portfolios a move towards safer sovereign debt issues by investment managers is expected. It also says the new riskier climate means investors should ensure that managers of their fixed-interest investments have the flexibility to respond to rapid shifts in bond values and yields.
"The gloves are off at the ratings agencies now and we can expect more downgrades," Mr Van der Maas says. "Investment managers will need to have the resources to properly identify the risks inherent in investing in sovereign debt. As public debt is continuing to grow in many countries – the problem is not going to go away anytime soon."
The Russell research stresses the traditional view of sovereign debt as a uniformly safe asset class is outdated because of the size of the obligations taken on by many governments around the world. An exposure to sovereign debt should now be monitored with the same vigilance as more 'risky' investments such as corporate credits.
"Active management of exposures within portfolios will be paramount to properly managing the risks inherent in sovereign debt," Mr Van der Maas says. "Set and forget is a thing of the past and conventional issuance weighted benchmarks are becoming less relevant."
"Although we are entering a time of greater risk, there'll also be real opportunities for the active fixed-interest investor to enhance their returns."
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