Individual bonds offer predictability

24-Oct-2017

By Sarah Kendell

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Owning individual corporate bonds was the best way for retiree clients to access predictability of income while also generating better yields than they would get through a bank term deposit, according to XTB.

Addressing a media briefing in Sydney yesterday, XTB co-founder and chief executive Richard Murphy said many retail investors were turned off fixed income by managed funds and exchange-traded funds (ETF), which did not offer the same guaranteed yield as holding a series of individual bonds to maturity.

“When we have conversations with people about the term deposit versus bond comparison, they often raise that they have looked at a [bond] managed fund and didn’t like the lack of predictability, so we point out that if they are holding the bonds as XTBs (exchange-traded bonds) through to maturity, they get exactly the same predictability, which is an important distinction,” he said.

“Imagine I buy 10 bonds from Australian companies and I know this one pays me $100 on this date, this one pays it on that date and I know on day one this is exactly what I am going to get.

“If you take those bonds and drop them into an ETF or managed fund, they all are trusts which are perpetual, and when they mature you have to replace them – [the manager] doesn’t know what bonds they are going to have to choose from or what is getting issued, so you end up losing the predictability of buying bonds yourself.”

He said retirees in particular were overwhelmingly choosing term deposits over other types of investments, despite the record low yields on offer, as they made it easier to plan the level of income they would receive from year to year.

“The equity market is at an all-time high, yet [investor] money is still in bank accounts – people are obviously just worried about world events and that is causing them to leave their money in the ultimate safe investments,” he said.

“For those investors who rely on their income from investments to live on, predictability is extremely important. That is the reason why they are in their term deposit – they know exactly what they are going to get and they don’t want to move into equities where predictability is very low.”

Bonds also provided an important diversifier during periods of high volatility in the equities market, meaning they could even out portfolio returns over time, he said.

“From 1992 to 2016, the volatility of equities was 15 per cent for an annualised return of 9 per cent, whereas bonds had an annualised return of 7 per cent for far less volatility,” he noted.

“If you had a portfolio of bonds and equities during the GFC (global financial crisis), you would have been better off because they are negatively correlated.”

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