Recently Deloitte Access Economics published “The Corporate Bond Report 2018 – Australia’s growing appetite for corporate bonds” which FIIG Securities commissioned to shine a spotlight on how the corporate bond market performed and the potential it offered to Australian investors.
Deloitte surveyed both Australian organisations and private investors, to better understand the motivations and outlook for the Australian corporate bond market.
While there were many positive signs for the growing market, lack of awareness remains high.
It’s important for all Australians to understand the risk they are taking by being overweight equities and severely underweight bonds. We have one of the lowest allocations to bonds and highest to equities in the OECD, making us more susceptible to market volatility and the possibility of losing capital in the case of a sharp downturn. As our superannuation fund pool continues to grow and is now one of the largest in the world as a percentage of GDP, it has never been more important to diversify and help protect our growing wealth.
One of the key findings was that the expected yield of an investment is the number one consideration affecting individuals’ investment decisions. Perhaps surprising to some, Australian bonds outperformed Australian shares over the decade 2006-16, with an average gross annual return of 6.1%, compared to 4.3% for Australian shares.
Corporate bond issuance is growing
Since 2010, the Australian corporate bond market has grown to two thirds the size of the listed share market (ASX) with more than $1 trillion of corporate bonds outstanding. The share of Australian non financial corporates’ overall capital structure that is comprised of bond funding has increased from 6% in 2007 to 11% in 2017.
Deloitte interviewed a range of organisations for the study, finding that there were various factors driving the growing corporate debt issuance, including:
- Longer term certainty in debt financing
- A flexible funding option within a company’s capital structure
- To avoid diluting company ownership through an equity raise
Corporate bonds have increasingly become a way to optimise the funding mix and to provide a flexible funding option in the overall capital structure.
Snapshot of private investment
Deloitte found that only 16% of high net worth individuals (HNIWs) surveyed have direct holdings in corporate bonds. The study surveyed 700 HNWIs with over $2 million in investable assets in Australia, but found that direct investment into corporate bonds made up 11% of total portfolio assets, when global best practice suggests this should be higher.
While Australian private investors hold less than 1% of all corporate bonds on issue domestically, those in the United States hold almost 20%. Our superannuation fund asset allocations are also trailing at 10% in bonds and bills, compared to an average 40% held by pension funds across other OECD countries.
The main reasons for investing in corporate bonds were:
- A reliable income stream -73%
- The level of return given risk profile – 72%
- Capital preservation – 54%
The study found that the biggest barrier to investing is largely due to a lack of awareness of the benefits of bonds. Almost 70% of non investors had insufficient understanding on how to invest in corporate bonds. This group was more likely to have a higher percentage of their portfolio allocated to property and cash investments, reducing the diversification benefits achieved by their portfolio.
What’s the outlook for corporate bonds?
Deloitte’s findings showed that the outlook for both the rated and unrated corporate bond markets in Australia was positive as demand continues to grow for high yielding fixed income products. HNWIs owning corporate bonds could grow from 16% to 29% in the next 12 months.
Investors’ number one concern is low yields in cash investments, and an increasing awareness of corporate bonds as an alternative fixed income investment option will support growth in private investor demand”, says Deloitte Access Economics Partners, John O’Mahony.
With corporate bonds “providing strong returns, a reliable income and historically outperforming shares during economic downturns; investors are beginning to tap into corporate bonds as a vital part of a well-balanced, diversified portfolio”, said FIIG Securities Manager Director, Jim Stening.
As the market continues to grow, FIIG is working to educate participants on the opportunities that exist within corporate bonds in Australia to align with global markets.
Elizabeth is a nationally recognised expert in fixed income. She has been with FIIG for 10 years, much of that time as a corporate analyst. Recently her passion for education has seen her author/edit FIIG’s “The Australian Guide to Fixed Income”.