Why do investors need XTBs in their portfolios?
The post-GFC period has been characterised by ongoing market turbulence driven by a sequence of global and domestic events that have arisen as a result of the GFC, subsequent recessions in many countries, and the instability of financial and political systems in some countries and regions.
Globally and in Australia this has caused ongoing investor uncertainty and caution. The lack of confidence in the years since the GFC can be seen in metrics such as the value of household savings held in bank accounts, including Term Deposits, which are currently over $834 billion (Source APRA, Feb 2017). This was less than $100 billion pre-GFC.
Australia’s equities love affair over?
While pre-GFC Australia had a love affair with equities and property to the exclusion of fixed income investments, the massive pool of savings in that most basic form of fixed income investment – the bank account, strongly suggests Australian investors have learned the lessons of the GFC and are now a great deal more diversified across the main asset classes. Demand for yield with less risk, which is what fixed income solutions deliver, is higher now than at any time in recent memory.
Recent market turbulence has got Australian investors looking for safer fixed income investments. Term deposits became popular but with interest rates going down there is a growing demand for higher yielding alternatives and an increasing awareness about the return potential of investing in bonds.
The evidence is also there in the Self-Managed Superannuation (SMSF) segment of Australian Super. There are more than 1 million SMSFs in this segment that account for $630 billion of the total $1,900 billion in Superannuation (Source ATO). As at 31 Mar 2016 the portion of SMSFs in cash was 26%, which is further evidence of the lack of investor confidence to invest this cash into riskier assets such as equities.
Recent estimates from the Australian Taxation Office (ATO) and Credit Suisse found that SMSF assets were split as follows:
SMSFs were estimated to own 16% of the Australian stock market.
Only 1% of SMSFs was held in bonds, and looking at Superannuation more broadly, consultants Towers Watson found the entire Australian super system held about 16% of its assets in bonds at the end of 2014. However the other seven big super systems globally that Towers Watson considered had an average allocation of 31%.
Bonds are an important asset class because they reduce portfolio risk by providing true asset class diversification. Bonds are generally negatively correlated to equities, while offering higher returns capability than term deposits.
Including bonds, or XTBs over them in your investment portfolio helps to preserve capital which is an important factor as people move towards retirement. Crucially, bond coupon payments offer retirees a predictable, stable income in retirement.
Who are XTBs suitable for?
- Investors seeking a regular, reliable income stream
- Investors looking for capital stability in their investments and Self Managed Super Funds (SMSFs)
- Investors looking to build their investment portfolio via direct investments on ASX
- Investors seeking to diversify their portfolio and blend fixed income with equity and property investments
- Investors looking for a lower risk investment, such as not-for-profits like schools, universities, charities and councils.
John Bogle, founder of the global investment manager Vanguard, famously coined what has become a bond allocation rule of thumb, “your bond allocation should roughly equal your age”. While clearly an un-scientific model for allocation of your investment assets, John’s comment makes the point well that investors need to be aware of the increased need for defensive assets as life moves forward….
Read our article: “Own your age in bonds”
Invest in XTBs
XTBs can be used in various ways to achieve your required investment outcomes.
Capital stability of investments
XTBs give you capital stability in your investment portfolio. XTBs are less volatile than other investments; such as equities, hybrids and property.
As the prices of XTBs are less volatile than other investments, you have less risk of losing your investment capital when markets are volatile, and more importantly fixed income investments like XTBs will generally be negatively correlated to equities and hybrids so they will protect the value of your portfolio just when you need it most – when equities and hybrids fall significantly. This can give you ‘peace of mind’ and security. Where XTBs are a core part of your portfolio, blending them with equities, hybrids, ETFs and property, may reduce the overall risk of your portfolio and achieve consistent returns.
Managing your cash flow
XTBs provide investors with a regular, reliable income stream. Investors can tailor their investment portfolio to include XTBs, ensuring that the portfolio is able to meet the day-to-day ongoing cash flow requirements of the investor.
Try our cash flow tool to help visualise your cash flow.
Directly investing into fixed income on ASX
XTBs offer you the ability to buy direct exposure to returns from individual corporate bonds on ASX. You can select which corporate bonds you want exposure to. There are almost 50 to choose from, giving you choice. (view all available XTBs).
You should seek your own financial and/or tax advice as appropriate. If you want to be referred to a broker or financial adviser, please contact us on 1800 995 993.
What are the media saying about XTBs?
Check out the insights for updates on XTBs in the media.
Case Study: Introducing David
David has an investment portfolio of $200,000 (including cash).
He’s looking to diversify into fixed income investments and as a regular share trader, prefers the transparency of the listed market. He doesn’t want additional equity risk or hybrid volatility, and is looking for greater certainty of final investment outcome. He wants to individually chose which corporate bonds to gain exposure to, just like buying shares. He’s looking for a low maintenance and efficient investment.
XTBs are the answer
David looks to invest in XTBs using $50,000 of his total investment portfolio across a range of XTBs. Selecting 10 different XTBs, David can chose which corporate bonds he wants exposure to, across different sectors of the ASX market. This gives David flexibility to achieve his diversification across different asset classes.
|APA Pipelines||Utilities||Incitec Pivot||Chemicals|
|Aurizon||Transportation & Logistics||Qantas||Industrials|
|BHP Biliton||Metals & Mining||Stockland||Real Estate|
|Crown Group||Gaming||Woolworths||Retail – Consumer Staples|
Missing opportunity: Investment portfolios in Europe and US have 20% exposure to Bonds*.
In Australian SMSFs the allocation is only just over 1%^.
*Source: OECD Global Pension Statistics, Issue 9, Sept 2014, Fig 14, page 13.
^Source: ATO 30 June 2015.