Investors could face a loss of capital if they don't properly prepare for a change in the fixed income market, according to Deutsche Asset Management.
While the outlook for the majority of 2007 looks good for fixed income funds, investors should diversify to spread the risk.
With corporate profit growth expected to slow and possibly start to decline this will eventually impact on corporate credit, Deustche fixed income portfolio manager Stuart Gray said.
"I think we will see diversification is the key. Corporate credit spreads are currently extremely tight which is only justified if default risk remains at its current low levels, a reversion to average default rates will negatively impact credit," Gray said.
Global diversification is also important as with money here being so cheap Australian merger and acquisition risk also plays a part.
"This increased risk will be at the forefront of credit investor minds in 2007," Goodhand said.
With spreads extremely tight the market is relying on improving running yield, as compensation for the added risk of corporate debt. Thus, investors need to protect themselves against the risk of credit spreads widening due to declining corporate results or merger and acquisition activity, Gray said..
Both these will impact heavily on the funds.
