How to get a piece of the corporate bond action

Australia’s corporate bond market is a hive of activity right now, with 45 new debt issues launched in the month of March alone.

This included issues by ANZ, NAB and Westpac, and a host of other big companies including AMP, Macquarie Group, Stockland and Santos.

March picked up the pace from January and February, with more than 100 new issues launched so far this year. And 2019 promises to get busier, with no shortage of investors wanting to buy into these Australian issues to generate stable fixed income returns.

Ranking lower down the risk spectrum than equities, bonds offer investors regular fixed income returns plus the return of their initial capital if the bonds are held to the full maturity date. A number of corporate bond issues are offering yields above 4 per cent.

Major bank issues are proving extremely popular, because each of the big banks is currently carrying a corporate credit rating of AA-, a high score that effectively indicates to investors that the chances of any of them defaulting on their outstanding loan commitments is minimal.

So the bank issues, and even others from entities with lower credit ratings, are attracting considerable investor interest, including from offshore investors.

And what’s attracting Australian corporates to the bond market in the first place is the ability for corporates to raise capital to finance their operations at a relatively low cost. The interest they need to pay back to investors is still extremely low.

Almost all of Australia’s top 50 companies are active in issuing bonds to raise debt funding, mainly from institutional investors, and the level of growth in corporate issues has added substantial depth to the domestic market.

Getting into the market

Retail investors can buy corporate bonds through a public offer (the primary market) or through a securities exchange (the secondary market).

If you buy corporate bonds through a public offer you will receive a prospectus and you can apply directly to buy the bonds. Before you invest, read the prospectus thoroughly so you understand the features and risks of the investment.

You also can buy and sell some corporate bonds on the Australian Securities Exchange (ASX) after they have already been issued in the primary market. If you buy bonds on the ASX you will pay the market price, which may be higher or lower than the face value of the bond. You will also pay a transaction fee.

But retail investors are also increasingly dipping their toes into this asset class through exchange-traded funds (ETFs) listed on the ASX.

In fact, there’s now multiple ETFs trading on the ASX that offer a blended exposure to hundreds of different corporate bond issues, and these funds are specifically aimed at investors wanting fixed income exposure in their portfolios.

The added advantage of these ETFs is that they also have holdings in corporate bonds that aren’t available through the ASX because they’re issued by unlisted companies.

The largest Australian corporate bonds ETF on the ASX currently is the VanEck Vectors Australian Corporate Bond Plus fund, which trades under the code PLUS and has $250 million in assets under management. It invests in a diversified portfolio of investment grade Australian dollar denominated corporate bonds, however it also has stakes in government and semi-government bonds.

The fund achieved a total return of 5.19 per cent over the last year, with an income return of 3.57 per cent and a growth return of 1.62 per cent.

The second-largest Australian corporate bond ETF is the Russell Invest Australian Select Corporate Bond ETF (RCB), which has around $191 million in assets under management. This fund’s biggest holdings are bond issues from the four major banks.

The keys to corporate bonds

Here are the main advantages of incorporating corporate bonds into an investment portfolio, either directly, through a managed fund or an ETF.

1. Diversification

Corporate bonds not only serve as a means of generating income in a portfolio and achieving asset class diversification, but the variety of different bonds available also provides diversification. As well as funds that are focused solely on the Australian market, there are also bond funds with global exposures to foreign government issues and multinationals. A third form of diversification can be achieved with buying bonds in foreign currencies. For example, of the latest Australian corporate bond issues, all were denominated in foreign currencies including in Chinese yuan renminbi, US and New Zealand dollars. Therefore, potential for exchange rate gains in the total return equation.

2. Payments are known upfront

Bonds provide certainty and consistency in terms of their returns because they have a fixed maturity date, a set yield and set dates for income payments.

4. Interest can be paid at a flexible rate

Retirees, in particular, are often looking to replace a lost income. The frequency of bond payments works in their favour by paying monthly, quarterly or half-yearly. Unlike shares, payment dates depend on when the bonds are issued.

The InvestSMART Interest Income Portfolio is designed for investors seeking a high level of stability and regular income by investing in domestic and global fixed securities. The Portfolio is invested in a blend of 5-20 Exchange Traded Funds (ETFs) to provide investors exposure to the performance fixed interest assets all managed in the one portfolio.

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