Investing in a low interest rate environment

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Future returns from investment markets are expected to be lower than those we have seen in the past. Louis Nel discusses changes we have made to some of our Private Bank strategies to ensure our clients have the best chance of achieving their financial goals.

Recently we announced that we’re making changes to our Discretionary Investment Management Service (DIMS) for BNZ Private Bank clients. A key part of this is about changing the ‘target investment mix’ of some of our strategies – that is, the amount we allocate to each underlying asset class, such as shares, fixed interest (bonds) and cash. At BNZ, we believe the target investment mix is the key driver of both the investment returns and the level of investment volatility you’re likely to experience over the long-term.

We regularly review the make-up of our strategies to ensure they are well-positioned for what we believe the long-term future economic and market environment might look like. We use advice we receive from JANA, our asset consultant, to help us determine the best mix of underlying asset classes for each of our strategies.

We believe investment returns are likely to be lower in the future than they have been in the past

Global interest rates, which have fallen significantly over the past 10 years, are sitting at extremely low levels as a result of the COVID-19 pandemic and the subsequent economic impacts.

Our view is that with global interest rates at such low levels, the future returns from income assets are likely to be lower than those we have seen in the past. We therefore believe investors in some of our strategies will benefit from having a higher allocation to growth assets – which have greater potential to generate more robust investment returns over the long term.

We have increased the allocation to growth assets for some strategies

Those following our Moderate strategy (previously called the Income & Growth strategy) have seen their overall allocation to growth assets increase by 5%, to 40% (previously 35%), while those following our Balanced strategy have seen their overall allocation to growth assets increase by 10%, to 60% (previously 50%). As a result, our long-term return expectations for these two strategies have also increased modestly.

Those who are following our other strategies will not have seen any changes to the income and growth splits of their strategies. However, there have been some modest changes to the underlying allocations to individual asset classes for some strategies.

If you’re invested in one of these strategies, you may have noticed some transactions within your investment portfolio, as these changes took place at the end of October 2020.

Risk and return

Although we’ve focused on long-term returns, equally important is risk. After all, you need to be comfortable with any ups and downs you might get from your investments along the way. The good news is that we don’t believe the changes outlined above significantly affect the risk profiles of our strategies.

Our fundamental approach to investing is unchanged

At BNZ, we continuously monitor investment markets and assess the impact of global events on the target investment mix of the strategies we offer. Although we have made changes to the make-up of some of our Private Bank strategies, they don’t affect our fundamental approach to investing. We continue to provide our investors with well-diversified investment portfolios that are able to operate across a range of market conditions, while giving them access to specialist investment managers carefully chosen from New Zealand and around the world. Of course, if you’d like to discuss anything in our recent communications, or if you’re worried about meeting your investment goals, please get in touch.

The information in this article is provided for general purposes only, and is a summary based on selective information which may not be complete for your purpose.  To the extent that any information or recommendations in this article constitute financial advice, they do not take into account your financial situation or goals and is not intended as personalised financial advice. While BNZ has made every effort to ensure that the information provided is accurate, you should not rely on this information to make any financial decision without first having sought advice specific to your circumstances from an authorised financial adviser. Neither BNZ nor any person involved in this article accepts any liability for any loss or damage whatsoever which may directly or indirectly result from this article.