Fixed-rate bonds pose more risks to investors
The negative performance of the headline bond index in Australia highlights the risks that traditional fixed-rate bond investments currently pose to investors, according to BetaShares.
The fixed-income investors who are seeking the defensive characteristics of bonds should look at floating rate bonds as a more attractive alternative to fixed rate bonds in the current market environment, the company said.
According to its study, “Bonds behaving badly? An analysis of recent fixed vs. floating bond returns”, higher bonds were leaving Australian fixed-rate bond index investors exposed to potential losses.
“Floating rate bonds posted good returns over the past year, and appear well placed to continue to perform strongly,” BetaShares’ managing director, Alex Vynokur said.
He explained that the challenge with the headline bond index in Australia is dominated by fixed-rate government and corporate bonds, meaning its capital return was highly sensitive to the changes in the general level of interest rates.
At the same time, the price of floating rate bonds was much less sensitive to changes in the general level of market interest rates.
“Accessing floating rates bonds has traditionally been difficult for the majority of investors, because of the high minimums required in institutional bond markets, and administrative burdens involved,” Vynokyur said.
The recent rise in bond yields, the capital return from the Bloomberg AusBond Composite Index (BACI) declined by around three per cent in the year to end-August 2017.
Recommended for you
There is one specific risk that is a significantly higher concern for financial services directors compared to companies overall and is impacting their risk appetite, according to the AICD.
Global fund managers are shunning bonds, with the asset class seeing the largest drop in allocations in more than 20 years.
Australian Ethical has seen its funds under management reach $10 billion, driven by organic customer growth and superannuation contributions.
Financial advisers will have access to private equity investments run by WTW for the first time as it launches a pooled fund to provide savers with access to traditionally institutional assets.