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Greece and its impact in your portfolios
There has been a lot of news over the last few days regarding Greece, Greek Bonds and the Greek economy in general. I thought I would address some of these in a short note. The vast majority of our fixed interest portfolios are invested with Dimensional Fund Advisers. We can confirm that there are NO Greek bonds in any of the Dimensional Fixed Interest Funds. There is also less than 0.4% exposure to Greece in the Dimensional Global Funds. Further, Portugal, Italy and Greece have never been eligible countries within the Dimensional Fixed Interest Trusts. Ireland is also no longer included in the Dimensional Fixed Interest Trusts.
Dimensional's current exposure to the EUR yield curve in the 5 year Dimensional Fixed Interest Trust is 5.83%.
Separately, within the 5 year Dimensional Fixed Interest Trust there is The European sovereign debt to the Kingdom of Belgium (USD - 1.6%) , French Treasury Note (EUR - 1.5%) and Netherlands Government (EUR - 1.6%). The other bonds in the fund from European issuers are Government agencies or corporates eg Rabobank (Netherlands, denominated in GBP, rated AAA, 1.7% weight).
Over night the Greek Prime Minister won a vote of confidence which enables his government to push through austerity measures in order to secure further international financial aid for the country.
As we have always stated, the role of fixed interest in a portfolio is to act as a kind of cushion or buffer in your portfolio, reducing the ups and downs and giving you a smoother ride. Bonds also should be a source of liquidity in your portfolio. That means they can be easily converted to cash if needed.
As longer -term bonds are more sensitive to 'maturity risk', staying in shorter-term securities offers some protection. But staying in cash all the time is not a good strategy because when interest rates are falling so do your returns.
The answer is to invest in a diversified fixed interest strategy where maturities vary depending on where the best opportunities are.
The second risk with bonds is that the borrower cannot repay the loan and you do not get your money back. This is called 'credit risk'. Credit risk can be dealt with by carefully selecting bonds from a range of issuers. A more defensive strategy would be to stick to the most creditworthy issuers, like governments and blue-chip companies.
Investing in international bonds adds further protection by giving your portfolio exposure to many different countries.
For your interest, the performances of the 3 Dimensional Fixed Interest Trusts to the end of May 2011 are
* These returns are net of Investment fees
| 1 year* | 3 years* | 5 years* | |
|---|---|---|---|
| Short Term Fixed Interest Trust | 5.48% | 5.17% | 5.74% |
| 2 year Dimensional Fixed Interest Trust | 5.73% | 5.83% | 6.03% |
| 5 year Dimensional Fixed Interest Trust | 8.68% | 8.16% | 7.45% |
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