by
Elizabeth Moran | May 26, 2010
Property investors know and respect the mantra; location, location, location. Key in fixed income markets is where the product sits in the capital structure.
Where an investment sits in the capital structure is crucial in determining whether the return adequately compensates the investor for the risk involved. Equities (or shares) are the highest risk and should provide the greatest returns. In contrast, most debt securities (with the exception of a very small number of hybrid securities) all sit higher in the structure and are safer in the event of liquidation. Generally they are lower risk and offer lower returns. Including debt securities in investment portfolios lowers volatility.
Figure 1
Risk has a direct relationship with reward. The higher the risk of a security the greater the expected reward. Investing a high proportion of your funds in the highest risk category, equities (shares) can expose your portfolio to loss in a cyclical downturn. Fixed income securities which are lower risk as they sit higher in the capital structure generally lower the risk of your overall portfolio, helping to preserve capital. See Figure 2 below.
Figure 2