Australians hold within their portfolios less than half as many bond allocations as their OECD peers. This proportion is even smaller – in the low single digits – for Australian self-managed super fund portfolios. Have we missed something? Or are our investment needs simply different to the rest of the world’s?
Perhaps we have been more comfortable taking on equity risk to enhance yields for clients. And from a practice management perspective it’s difficult to offer bonds to clients, thanks to the sophisticated investor test requirements, a lack of transparency and the over-the-counter nature of these transactions.
Short term fixed rate deposits are attractive .. but have their limitations
The Australian fixed income marketplace for non-institutional investors is mostly characterised by short-term fixed rate deposits. A much smaller proportion of funds are held in deposits beyond 12 months, despite the falling interest rate environment we have experienced since 2008 and the current dovish outlook.
As a result, clients with portfolios weighted towards short-term deposits have seen smaller gains than those with longer investment horizons. This has led many practices to seek a wider selection of platforms and institutions, to help improve their client’s returns. But are they really solving the problem?
By increasing the number of deposit platforms – and hence the number of providers – advisers can usually find an improvement in returns of 10 to 15 basis points over the 90- to 180-day periods. But for longer-term investments this strategy has reduced clients’ interest income, as rates have fallen by more than 4 per cent over the past seven years. So the problem is still there.
Why not consider an alternative for your clients portfolio?
Interestingly, and regardless of their clients’ investment horizons, advisers have been reluctant to consider other fixed income alternatives – like medium- and longer-term bonds – as tools for managing the interest rate risk. This is despite the considerable capital gains made on fixed rate bonds over the last few years (due to falling rates), as well as attractive margins over the 90-day Bank Bill Swap Rate for floating rate bonds.
A lot of this has changed in recent months and there is much to look forward to in the fixed income space, from the Commonwealth Bank and from other institiutions. This includes an increased range of fixed, floating and flexible rate deposit products; enhanced data feed capabilities and settlement options; greater access to new bond issues; and improved pricing transparency and research services.
