Investors too reliant on term deposits

15-Sep-2017

By James Dunn

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Despite record low interest rates, Australian households have stashed more than $850 billion in bank-held deposits, turning to the low-yielding products out of familiarity, according to the Australian Corporate Bond Company.

Referencing recent Australian Prudential Regulation Authority statistics from July, the group’s chief executive, Richard Murphy, said because many investors had not had opportunities to invest in high yielding fixed income vehicles, they tended to default to term deposits, or take capital risk to gain access to share dividends.

While the retail bond market had been slow to develop in Australia, in recent years products such as fixed income exchange-traded funds (ETFs) and exchange-traded bonds (XTBs) had filled the gap to a large extent, he added.

“Before XTBs there was a gaping hole on the ASX for investors seeking individual securities between low-risk government bonds and much more capital-volatile and complex hybrids, and the equity market,” says Murphy.

“Corporate bonds are the missing link. They provide greater returns than term deposits, with the added convenience of daily liquidity through ASX trading.

“XTBs provide investors and savers with additional return for the risk of lending money to a S&P/ASX 100 company, rather than the bank for term deposits.”

Murphy said the access to corporate bonds provided by XTBs, combined with the transparency and liquidity of the ASX market, made the vehicles particularly suitable for yield-oriented retail investors.

Australian Corporate Bond Company – which had recently been rebranded XTB – had 50 XTBs listed on the ASX, with a market capitalisation of $238.3 million.

To make it easier for retail investors to establish a diversified portfolio of XTBs, the company had also created a series of model portfolios and offered two separately managed accounts (SMAs) of XTBs on Praemium and Macquarie Wrap.

Over the past 12 months, Murphy said, XTB’s model portfolios had proved their mettle, outperforming the relevant bond indices.

“Our portfolios outperformed a range of popular investment products that track these indices – including ETFs, exchange-traded products (ETPs) and managed funds,” he said.

XTB’s Fixed Rate Model Portfolios had outperformed four comparative and popular ETFs and ETPs by as much as 350 basis points on an after-fee basis for the 12-month period ending 31 August, the company said.

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