The recent decision by BHP Billiton to cut its dividend by 75% has shaken many across the country, with the miner a mainstay of many investment portfolios. For retirees looking to derive an income from their investments, such a massive cut is a serious concern. It emphasises the need to look at investments through a different lens.
BHP’s move highlights the enormous transition the world is experiencing. Volatility has increased, returns have slumped. Term deposits are at all-time lows in terms of returns, but all-time highs in terms of the $750+ billion in household bank accounts. Investors are worried and don’t want to risk hard earned savings. Equities and hybrids are volatile and now the likelihood of Bluechip stocks continuing to deliver the kinds of dividends we’ve seen for many years is being questioned.
Australia was lucky enough to fare better than most advanced economies during the GFC, but we couldn’t keep avoiding the impact of the subsequent global recession. This environment breeds negative sentiment – both in boardrooms and in households – and impacts the investment decisions of both institutional and individual investors.
There is no denying it. The world is a very different place. Investment allocations and strategies need to adjust accordingly for everyone. For those who are simply planning to ‘ride out’ the storm – it’s essential to consider that several years of low returns and volatile prices can wreak havoc for any nest egg.
Since the great expansion of individual share ownership began in the 1990s, we’ve all enjoyed year after year of dividend growth. But shares can no longer be relied upon to do all the heavy lifting for your income. It’s time to start thinking about why professional money managers diversify equity ownership with bond ownership and the role fixed income can play in offering capital stability and predictable income. To be clear, we’re talking about real bonds here, not hybrids.
The role of corporate bonds
Traditionally, Australian investors have relied on long-favoured term deposits¹ for the fixed income component of their portfolio, with very little exposure to bonds, because they weren’t generally available on ASX. This was one of the driving factors behind the inception of XTBs – Exchange Traded Bond units – launched in May 2015.
XTBs offer individual investors a chance to access the benefits of the corporate bond market – access that previously had been the domain of wholesale investors and large institutional investors. Unlike hybrids and equities, corporate bonds, and XTBs over them, can form part of the fixed income component of diversified investment portfolios.
With many Australians approaching retirement, ensuring both capital preservation for nest eggs and regular predictable income is going to make all the difference between an enjoyable lifestyle and a stressful one spent itemising daily expenses.
Better fixed income
It’s our mission to be part of a move towards more balanced investor portfolios and our goal is to see more investors incorporate fixed income into their investment mix. As we’ve seen with the recent turbulent market conditions, true capital stability is not always available from equities and hybrids.
Richard Murphy is the CEO and Co-Founder of Australian Corporate Bond Company
¹Term Deposits may enjoy the benefit of protection under the Financial Claims Scheme.