Australia playing catch up on fixed income appeal

Australian investors have been urged to take inspiration from their global counterparts in increasing their exposure to fixed income assets, as appetite continues to surge for higher-risk opportunities such as private credit.

New commentary from FIIG Securities, the fixed income division of wholesale trading platform AUSIEX following its acquisition earlier this year, said Australian investors are more likely to invest 90 per cent of their portfolios in riskier investments.

“If you look at similar economies like Canada or the UK, for example, you see allocations to bonds generally between 30 – 40%,” Jonathan Sheridan, Director at FIIG Securities, said.

“In Australia, most investors’ allocations are under 10% of their portfolio. It seems that the rest of the world is telling us that we should increase our allocation to fixed income.

“For instance, we have bond yields that are higher than they’ve been for decades – and providing strong income solutions as well as capital preservation, which makes them appealing given the sort of geopolitical uncertainties that we’ve got along with other markets hitting record highs.

“When you’re looking to protect your capital, bonds are one of the best ways that you can do that.”

Sheridan said market conditions have driven strong fixed income performance over the last few years, due to its stability and diversification benefits, which can be further enhanced when combined with active management.

“We’ve moved from relatively low yields in the 2 – 3% range from fixed income, which is well below what most clients are looking for from their defensive portfolios,” he said.

“Now we are in an environment where those same high-quality liquid bonds can give you 5 – 6% income, which creates a much stronger role for those sorts of assets in a portfolio.

“It can be even higher if you engage in active management. Firstly, you’ve got your headline yield, which is what a bond would pay if you hold it to maturity. We’re getting 5 to 6% out of high-quality liquid investment-grade bonds in the public markets at the moment.

“The performance of a bond over its life cycle is not a flat, say, 6% from start to finish. You typically get a stronger performance in the first couple of years and then weaker. For example, you might actually receive an 8% return in the peak years.

“What we’re trying to do is actively capture that 8% return in the first couple of years – and then move into a different bond, offering a premium at the start of its term.

“This active management is key to maximising returns from fixed income. So, while the headline yields that are being shown in the markets are typically of 5 to 6% over the past couple of years, for our clients on average, we’ve historically returned 9%* a year by using an active trading strategy.

“This means there are potentially pretty strong returns available in the market for those who know what they are doing, noting that past performance is not an indicator of future performance, of course!”