In the latest edition of Meet the Manager, BDO Private Wealth met with Greg Stock to discuss the Perpetual Active Fixed-Interest Fund, his experience with Perpetual Limited, and the risks investors should consider when investing in securities.
Greg holds over 28 years of experience in investment management, accounting, and risk management. He is the Head of Credit Research for Perpetual Investments as well as a Senior Portfolio Manager, responsible for trade execution and portfolio construction for several of Perpetual’s cash and fixed-interest funds.
Investment philosophy and approach
Perpetual has managed the Active Fixed-Interest Fund strategy for over twenty years, launching in institutional form in 2005. The fund aims to provide investors with a diversified portfolio of securities, predominantly corporate bonds and government bonds.
Perpetual employs an active and risk-aware approach to managing investments, aiming to provide consistent returns by diversifying portfolios, avoiding poor-quality credits, and making strategic decisions based on relative value assessments.
Greg identifies two primary risks associated with fixed-income markets – credit and duration risks. Both credit risk and duration risk are ‘first-order’ fundamental and significant risks that investors should be aware of when investing in fixed-income securities. Both are important, though they offer different trade-offs between risk and potential reward for investors, with varying impacts on potential returns.
What is credit risk?
Credit risk refers to the potential that a borrower or issuer of a financial instrument may fail to fulfill their contractual obligations to make payments on time or repay the principal amount borrowed. In other words, it's the risk of default.
As specialists in active credit management, Greg explains that the Perpetual approach is guided by a keen awareness of credit risk, which involves evaluating the likelihood that borrowers may fail to meet their repayment obligations.
The Perpetual strategy focuses on building diversified portfolios, carefully selecting investments to avoid poor credit quality and bad credit, and constantly assessing relative value to avoid any bias. This approach offers a means of managing credit risk while striving to achieve optimal risk-adjusted returns for investors.
“With a risk-aware focus, active credit management has produced repeatable risk-adjusted returns for investors,” Greg states. “That's why we think it's the best approach to managing risk and getting the best risk-adjusted returns for investors.”
What is duration risk?
Duration risk is the time it takes to get your money back. Or in other words, it’s the sensitivity of your investment’s value to changes in interest rates. If interest rates decrease, it has a positive impact on the portfolio value, while a rate increase will see a negative impact on the initial value of the portfolio.
Perpetual employs modest duration limits, which means they have specific thresholds or boundaries set on how much duration risk they are willing to take on.
For a portfolio of investments such as a portfolio of bonds or bond fund, Perpetual have set a five-year duration benchmark to serve as a reference point for managing the duration of the portfolio. This means that, over time, the company aims to keep the portfolio's sensitivity to interest rate changes in line with the benchmark's duration.
Greg acknowledges that duration risk is also important and needs to be managed, but it's considered a "low order value." This means that while it's not as immediately significant as credit risk, it's still worth paying attention to.
Should you wish to discuss how your portfolio is positioned in the context of your investment objectives and market risks, please speak to your local BDO Private Wealth adviser.
Perpetual Limited is licenced to provide general advice. The information contained is not advice, is general in nature and does not take into account your objectives, financial situation or needs. Before making a decision to invest in this fund please consider the relevant Product Disclosure Statement and Target Market Determination to determine if the product is right for you.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
BDO Private Wealth Advisers Pty Ltd ABN 62 805 149 677 AFS Licence No. 238280 is a member of a national association of separate member firms which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Private Wealth Advisers Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of separate member firms. Liability limited by a scheme approved under Professional Standards Legislation.
BDO is the brand name for the BDO network and for each of the BDO member firms.
© 2023 BDO Private Wealth Advisers Pty Ltd. All rights reserved.