Can SMSFs invest in corporate bonds?
Equities have long been the preferred investment for SMSFs, but corporate bonds are an investment tool that trustees might be wise to consider in the current low interest rate environment.
Self managed superannuation funds (SMSFs) remain disproportionately underinvested in bonds in general and additionally, of the $630bn in SMSFs as at March 2016, 26% was invested in cash, according to research by the Australian Corporate Bond Company (ACBC).
ACBC brought XTB corporate bond securities to the Australian Securities Exchange (ASX).
With the Reserve Bank of Australia cutting the cash rate from 2% to a record low 1.5% over the course of the past year, such a large proportion of funds allocated to cash could have seen a negative impact.
While the risk of investing in corporate bonds is higher than keeping funds in cash, SMSFs could have invested at yields of up to 5.6% through XTB corporate bond securities in the past 12 months, ACBC data shows.
Bonds are an important asset class that can assist with portfolio diversification.
While corporate bonds were traditionally difficult for individual investors to access, Exchange Traded Bond units (XTBs) are securities traded on the ASX, enabling easy access, transparency and liquidity.
XTBs are backed by the actual bonds and all coupon and principal payments from the bonds flow through to the XTB investor.
Since launching just over a year ago, $100m of XTBs has traded on the ASX.
Corporate bonds can give diversification across companies, sectors, countries and economic cycles.
They are generally negatively correlated to equities, meaning they might assist with risk management by offering a buffer to share price falls.
Bonds can offer coupon payments, providing regular and predictable income in retirement.
Generally, they will offer higher returns than cash deposits and they might help preserve your capital when equity markets are volatile.
ACBC’s research shows that SMSFs own about 16% of the Australian stock market, but those same funds only hold 1% in bonds.
Source: Commonwealth Bank