A simple maxim in investing is that to generate a higher return you need to take on more risk. This basic principle applies across asset classes, whether it be equities through to income generating assets like bonds. Against a backdrop of declining interest rates Ken Liow from Realm Investment House says investors should be mindful how ‘yield targeting’ can expose you to greater risks.

“In 2016, you could expect around 2% a year as a fairly safe rate from BBB-rated securities, but today that figure is closer to 1%,” he says.

“If you want to continue to get that 2%, you’ll have to step right into sub-investment grade credit or some other ‘interesting’ types of instruments.”

This means fund managers can be tempted into riskier behaviours trying to maintain higher portfolio yields. Liow emphasises that now more than ever, it’s crucial for investors to understand what’s going on in their fixed income portfolio and to know exactly what their fund manager is doing.

In this short video Liow provides more detail on yield targeting and some useful tips on how to assess how much risk a fund manager is taking.

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