Jonathan Sheridan

There has not really been that much value in the listed hybrid market, suggests Jonathan Sheridan, Director at FIIG Securities, the Fixed Income Division of AUSIEX.

“If you think that there’s still value in hybrids, versus other fixed income instruments that are somewhat equivalent, then you should keep them.”

Though he notes “many advisers are acting now and transitioning as their investor clients recognise there are other bond yields that are more attractive today”.

Mr Sheridan notes that while there’s no like-for-like replacement, advisers are splitting money across different investments. “For example, Tier 2 bank bonds are one area, listed fixed income offerings are another, as are fixed income funds – and all can bring diversification into a portfolio.”

What will replace bank hybrids?

“I think tier two bonds, for example, are the natural home,” says Mr Sheridan. “They have some equity characteristics, and the equity characteristics only come into play in crisis times. And I don’t think anyone thinks that any of our major banks, for example, are likely going to fail.”

He adds, “The other thing that we’re seeing is growth of the listed bond market. As investors look for higher-yielding listed alternatives to hybrids, we’re seeing issuers coming to the listed market knowing that there is this investor capital pool that is becoming more interested.

“For example, we participated in the recent raising for RAM Capital, and another is in progress from a global infrastructure manager – these issuers are looking to capture funds that are coming out of the hybrid market.”

Mr Sheridan says, “This offers greater diversification for fixed income investors.” FIIG, through its parent AUSIEX, operates in both the over-the-counter and the listed markets.

“Diversification is actually easy within our space. You can have 4 – 5% bulletproof government debt and you can have 15% high-yield corporate debt – and everything in between.”

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Jonathan Sheridan

Australia’s largest fixed income specialist, FIIG Securities has recently announced that it has partnered with German Index firm Solactive to launch Australia’s first domestic high yield bond index.

FIIG has launched the index in Australia in response to demand for a benchmark for AUD-denominated high yield bonds to improve investors’ ability to assess performance and make investment decisions about the Australian corporate bond market.

The Solactive FIIG Australian High Yield and Non-Rated Bond TR Index is the first index to exclusively cover High Yield and Non-Rated Bonds in Australia. Its first-of-its-kind design provides individual and corporate investors, and financial advisers a solid foundation to make prudent investment decisions while functioning as a leading benchmark for AUD-denominated high yield bonds.

The index has data as far back as 2012, is engineered to mirror the performance of the AUD-denominated Australian high yield corporate bonds universe including both rated and unrated constituents.

Since inception in December 2012, the Solactive FIIG Australian High Yield and Non-Rated Bond TR Index has generated a cumulative return of 59.40% to 30 September 2019 or a compound annual return of 7.15% over the same period. Currently, the Index contains 51 bonds issued by 41 issuers. AGL Energy, Crown Resorts, NextDC, Downer and Virgin are the top 5 issuers by outstanding volume and make up 48% of the index.

Jonathan Sheridan, Chief Investment Strategist at FIIG Securities commented, “Historically it has been difficult for investors to assess the Australian high yield bond market and as a consequence corporate bonds fly under the radar for most investors. We expect this new index will contribute to our strategy to demystify the bond market in Australia and make this far more appealing for investors.”

Vanguard research revealed Australian bonds have returned 8.4% pa over a 30+ year period from 1 September 1987 to 31 August 2019, compared to 7.9% for Australian equities and 6.7% for international equities and have historically been significantly less volatile than equities.

According to a recent study published by Deloitte^[1], Australia’s hunger for corporate bonds rose by more than 40% between 2010 and 2018. In spite of this growth just 16% of high net worth individuals in Australia directly own corporate bonds. Conversely the research shows that older Australians allocate more than a third (34 percent) of their investment portfolio to shares, a trend FIIG believes is attributable to a lack of awareness among Australians of other investment options available. Institutional participation in the high yield corporate bond market is gaining significant momentum.

The Australian corporate bond market currently has over $1 trillion of Australian corporate bonds outstanding – more than two-thirds the size of the Australian stock market. According to FIIG the market is creating opportunities for fund managers who are turning their attention to corporate bond investments as the banks become increasingly more disintermediated in Australia. The high yield corporate bond market is emerging as a significant asset class within the corporate bond market.

Timo Pfeiffer, Head of Research at Solactive, commented: “The Australian corporate bond market is around 70% the size of the ASX, yet despite the sheer size and growth opportunities, High Yield bonds rarely are on investors’ radars. We are proud to have worked in this first project with Australia’s leading fixed income experts, whose forward-thinking and client-focused spirit has been a perfect match for Solactive and has brought us together in the development of an index that will bring high yield bonds on to an investor’s radar.”

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[1] fiig.com.au/pages/corporate-bond-report ^ Source: Vanguard, as at 31 August 2019

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