Innovation and unprecedented market conditions create ‘perfect storm’ for fixed income

Richard Murphy

Richard Murphy

Record-low interest rates and increasing volatility are driving a growing search for capital stability and predictable income. This is paving the way for a marked shift towards more defensive investment portfolios, according to Australian Corporate Bond Company (ACBC).

Launching the firm’s new whitepaper, ‘Lower rates for longer: Implications for Australian fixed income’, ACBC CEO and co-founder Richard Murphy said extraordinary market conditions and product innovation had created a perfect storm for fixed income investments.

“Until relatively recently, Australian retail investors have not felt the need to invest in fixed income, or corporate bonds in particular, largely due to a lack of awareness, information and most importantly, opportunity.”

“However this is changing – recent innovations, such as XTBs (Exchange Traded Bond Units), fixed income ETFs and exchange-traded Australian Government Bonds, are making it much easier for retail investors to access fixed income, on ASX.”

According to Mr Murphy, fixed income should form a critical part of any properly balanced portfolio, providing capital stability and regular income.

“We are living in a low interest rate world, and in this context fixed income is arguably more important than ever. A 1% variation in income matters much more in an environment of near-deflation and low single-digit interest rates than in a world of, say, 2-3% inflation and 5% interest rates.”

Mr Murphy added that the current exceptional market environment was bringing a number of key questions to the fore, as advisers and retail investors look to build more defensive portfolios.

“These questions range from the suitability of managed solutions versus a direct approach, the impact of index tracking for fixed income investments and where hybrids should fit within a portfolio.”

Bringing the corporate bond market to retail investors

ACBC launched XTBs in May 2015 to fill the gaping hole on ASX in the breadth of fixed income investments available to individual investors. They bring greater accessibility to the corporate bond market – previously dominated by institutional investors.

Each XTB offers investors a simple, ASX tradable security that tracks the performance of a specific underlying bond (after fees and expenses) with no minimum investment. One year on, more than $50 million worth of XTBs have traded, reflecting the growing appetite for fixed income investments.

A total of 39 XTBs are now available on ASX and via 25 leading platforms. XTBs have also been approved for distribution by 140 Australian dealer groups.

“Our focus has always been to drive a greater understanding of the need for fixed income and the role corporate bonds can play in building better fixed income portfolios. We are continuing to grow the range of XTBs available and are committed to providing ongoing educational support to investors and advisers,” said Mr Murphy.

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