Researchers warn of debt-product risk

By ELLEN READ

Retail investors should take "extreme caution" in investing in debt products as the financial environment turns against them, investment researchers say.

New Zealanders have up to $25 billion in fixed-income investments - spread between finance companies ($12 billion to $14 billion), mortgage funds ($4 billion), hybrid debt investments offered mainly by brokers ($500 million), and corporate bonds ($6.5 billion).

The top of the interest rate cycle and an expected deterioration in business conditions have prompted researcher FundSource to speak out.

"We would like to express concern and urge extreme caution," said business manager Tim Anderson.

"We're carefully monitoring the situation and our concern is heightening.

"Money continues to flow into these debt investments and we feel there is a lack of understanding of the investments and the risks involved."

FundSource has issued a research paper, The Changing Face of Income Investing: Are the Risks Really Understood?

The research was prompted by substantial growth in the size, diversity and complexity of the debt products, a forecast deterioration in NZ's economic - and therefore credit - environment over the next two years and anecdotal evidence of investors' lack of sophistication.

"Looking forward to next year there is a distinct possibility that we'll raise our concern to a warning," Anderson said.

Economists are picking one and possibly two more rate rises in the next few months.

Anderson would like to see investors learning more about where they are placing their money.

"They can't rely on the perceived safety of fixed-interest investments."

If the sector went downhill far and fast, investors' original capital could be at risk, Anderson said.

He recommended diversifying portfolios and spreading money across different types of fixed-interest investments.

Fund Source