Whether you’re just starting out or have years of experience investing, the range of investment options can be quite daunting. One of the first decisions people make is often to choose between a “managed solution” or managing their own mix of investments. Often if you manage your own investments, you will decide between investments in property, shares and deposits, as these are the most readily available and known investment choices.
While managed fund investments appear to be less work with an expert managing your investments, there are downsides too. For instance, the market value of the fund will be fluctuating with the market, the costs of entry and exit are sometimes high and you can experience low transparency regarding the underlying investments and have no control over investment decisions of the manager. A “balanced fund” will likely have a fixed income allocation however you don’t always know, nor have control over, the quality or quantity of the exposure in the fund.
Some of you will have become very comfortable “stock picking” and choosing mostly share investments in companies that you believe will be profitable and grow over time. Of course, with share-based investing, the hope is for continued company solvency, capital growth over time and return on investments by way of solid dividends.
When you choose growth assets like shares and property, you are placing your capital at greater risk, without contractual representations for capital return or a defined investment term. When you’re looking for capital preservation, periodic income and term definition, you have been limited in choice to cash and deposit products or low yielding government bonds.
Can corporate bonds plug the investing gap?
There are several reasons why you would hold corporate bonds in a balanced portfolio.
- The first is that corporate bonds will usually outperform deposit products over any given period, taking into consideration income return only and noting that deposit products are subject to the government capital guarantee terms.
- The second benefit of holding corporate bonds in a balanced portfolio is that they offer income that is more predictable than equity dividends, which can be stopped by or determined at the discretion of the company.
- The third benefit is that the corporate bonds are legal commitments from the company issuer to you, to pay regular coupons and the face-value capital at the maturity of the bond. This means that corporate bonds issued can be less risky, when compared with an investment in the company’s equity.
- Finally, most corporate bonds usually perform well in environments where interest rates fall, which is often in periods of economic weakness. These more challenging times usually coincide with share market volatility and weakness, giving corporate bonds an investment edge in these times, giving you stable and predictable returns.
Fixed rate bonds perform better in an environment where interest rates are falling. In an environment of strong economic growth where interest rates are likely to be rising, you may also choose exposure to floating rate bonds. These bonds adjust their coupons with changes in the official cash rate and are therefore quite stable (in terms of their market value) during economic conditions resulting in interest rate hikes.
How can I access corporate bond investments?
Corporate bonds have traditionally been difficult for retail investors to access due to high financial entry points however, with ETBs you can trade in the exposures to quality corporate bonds. You are able to purchase various ETBs to create your own portfolios, or a mix of ETB investments with exposures to different issuers and industries – diversification at your fingertips. ETBs are traded on market and accessible like shares but pay periodic fixed or floating dividends and capital return at maturity, mirroring the payments in the underlying corporate bonds.
For any questions on corporate bonds or ETBs, please contact us.
