Bonds are part of the Fixed-interest asset class. In buying these assets you are investing in debt securities issued by governments, semi-government agencies, corporations or major projects. Often called ‘bonds’, they are issued for a set amount (the principal or face value) over an agreed period, usually at a set interest rate (the yield). Returns are made from regular coupon payments and the movement in capital value.
Did you know in Australia, we are by far the lowest investors in bonds across the OECD? The OECD Global Annual Survey (Oct.2013) highlighted this glaring anomaly. Whilst the OECD average has over 50% of pension assets allocation to fixed interest, can you believe in Australia that superannuation funds have less than 10% allocated? Even more concerning is that SMSF have less than 3% allocated to fixed interest?
So why invest in bonds?
Diversification
Portfolio theory has proven that investing in uncorrelated assets will reduce the risk of getting negative returns. When saving for retirement, or living in retirement, you don’t want to put all your eggs in one basket – to avoid breaking them all at once. By adding the return profile of fixed interest to your portfolio, it will increase the expected returns over many years of investing. While several asset classes may perform poorly, another may perform well.
Capital Preservation
By the nature of bonds, the original principle or face value is returned to the investors at the end of the bond owner. This is similar in the way a term deposit is returned to the investor. This feature should be highly attractive to those who want to secure the value of their hard earned capital, rather than risking it all on more volatile assets. Bonds are often secured against the assets of the government or company and will be paid out before any owners receive funds.
Income Flow
The closer we come to living off our savings, the more we will value the income stream offered by bonds. You are able to structure your portfolio to receive a regular flow of interest payments to contribute to a desired cash flow to live off. It is not uncommon for listed equity companies (shares) to reduce or stopped paying dividends – often at a time when the investor needs it most – as these payments are meant to be from profits. Whereas companies pay their interest dues on debt securities (bonds) more as an operating expense (ie. paid before hyrbid or equity holders).
And why use iBonds to invest?
1. GAIN CONTROL and TRANSPARENCY
By investing via iBonds you are directly purchasing bonds so you can control your exposure to their income streams, issuer’s credit worthiness, industry sector without fund restrictions (ie. Redemption closes). Full transparency is provided by directly giving you the decision to invest in a particular bond, or not.
2. REMOVE PERFORMANCE and MANAGEMENT FEES
iBonds has no fees for fund performance or management fees. We offer a pay as you use investor directed portfolio service.
3. STOP CHASING SHORT TERM GAINS
Fund Managers are forced into having their fund returns published every year. To encourage new deposits to their funds, and thereby increase their performance fee collection, fund managers are directed to maximising short term gains. This can work against the term term investor, especially in the fixed interest asset class where many bonds could otherwise be held to maturity.
4. IMPROVE EXPECTED RETURNS
For SMSFs that aren’t yet allocating to fixed interest, adding bonds to your portfolio will improve expected returns over the long term. It is shown that SMSFs have 30-40% of funds allocated to cash, much of which would earn higher returns in bonds.
5. INCREASE FLEXIBILITY
Easier access to directly increase and reduce exposure to Fixed Income assets, and individual.
6. TAX ADVANTAGES
Did you know that Capital Gains Tax (CGT) events can occur when a fund members makes a redemption? And did you know that event results in tax the fund has to pay out, leaving less for the remaining members? By investing directly through iBonds, you take more control over your CGT liability creation.
7. ENABLE ADVISERS TO ACT
Greater control is enabled for advisers to act on behalf of SMSFs or wealthy individuals.
