The first six months of the year was an investor’s dream. To 30 June 2019, performance including dividends across the indices was stellar:

• ASX 200 Accumulation Index: up 19.73%
• S&P 500: up 18.54%
• Dow Jones Industrial Average: up 15.40%
• Australian Composite Bond Index: up 6.59%
• Australian Credit Index: up 5.60%

Global View

The US cut interest rates on 30 July despite unemployment being at 3.7% (July 2019) and equity markets trading at record highs. This was an unusual step with the Fed saying they are trying to get ahead of the market. The market was disappointed with the early rhetoric from Fed Chair Jerome Powell and reacted accordingly before the chairman restated that further cuts are likely.

The US – China trade wars continue to cast a shadow over the global economy. All eyes are on whether there can be some sort of resolution.  In Germany, 30-year government bonds are trading at 0% yield to maturity.

Australian View

Domestically, retail sales were slower than expected and the chance of two additional rate cuts have been priced in by the market. You can see from the table below the market is anticipating two further rate cuts by May next year with one of those rate cuts fully priced in by the end of this year.

Chart 1: ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve

As at market close 7 August 2019

So, where do we go from here?

Venture into new riskier territory?

We have seen a spate of LIC and LITs come to the ASX providing access to lower levels of credit than XTBs. The flow of funds to these new vehicles has been huge. Investors seem to be chasing yield at all costs. But do investors actually know what is included in the products they are buying? Where do they sit in the capital stack or in the repayment line in a credit event?

Historically in Australia, investment grade credit has been a strong performer supported by the fact companies that issue bonds have access to equity capital markets to raise funds. XTBs also provide the benefit of having a defined maturity date, so investors know that, in the absence of any default, they will receive their $100 face value back per unit.

In a credit crisis, can you say the same for your chosen fixed income investment?

‘Fixed income’ gets lost with bond funds and ETFs

Bond funds and ETFs are continual – there’s no end date and therefore they can’t provide a predictable return BEFORE you invest. Being pooled products, new bonds are added or removed, sometimes on a daily basis, with potentially hundreds of bonds included. That’s good for diversification, but it means investors don’t know what their income or return will be.

Knowing your cash flow BEFORE you invest is at the core of fixed income

Given market performance and the rush of money to new investments on the ASX that aren’t completely transparent, the common question investors and advisers are asking is, ‘where do we go from here?’

Known outcomes and diversification across all asset classes have never been more important. The following three points may be key to investment selection moving forward:

1. Investments that are transparent
2. Are easy to explain to clients
3. Investments which perform the way they are expected to in different market conditions.

Moving on and consider XTB Performance

XTB recommended portfolios and SMAs continue their strong performance. Table 1 shows the annualised performance of each XTB portfolio since inception to 30 June 2019.

Table 1: XTB Performance to 30 June 2019

Source: XTB. Important Note: Past performance is not an indicator of future performance.

True fixed income products should provide you with a yield to maturity (YTM) of your investment before you invest. YTM is the total expected return (price movement and income) for holding those bonds or fixed income assets to maturity. Before you make any fixed income investment decision, you should find out what the YTM of a fund, ETF or XTB is. And don’t overlook fees – unlike XTBs, most funds and ETFs provide their YTM before fees, whereas XTB yields are after fees.

Is there a best destination?

One thing worth remembering is that a balanced approach is usually the best one. For those underweight in fixed income or who feel the equity market has reached its peak, now may be a good time to allocate more assets to fixed income.

Rates may seem low now, but with further cuts expected, you may look back and be pleased that you locked in the predictable income and 2% return from a 2027 XTB when you did.

More information

ACBC Fixed Income No. 1 SMA

ESG Fixed Income SMA 

XTB performance reports

Call us on 1800 995 993 for a customised portfolio cash flow summary for your client.

Disclaimer

Past performance is no guarantee of future performance. Returns may reflect the underlying bond performance adjusted for XTB fees. The performance of fixed rate bonds has been positively impacted by recent interest rate cuts, whilst there is an expectation of further interest rate cuts, as evidenced by the futures market pricing, if the interest rate cycle turns, it is likely that the performance of fixed rate bonds will be negatively impacted.

The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should read the PDS that relates to that Class of XTB prior to making an investment decision and consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.