Are Australian investors overlooking corporate bonds?
Just 16% of high net worth individuals in Australia directly own corporate bonds in their portfolios.
Corporate bonds are being widely overlooked by Australian investors as most fill their portfolios with equities and property instead, according to The Corporate Bond Report 2018 released today by Deloitte Access Economics and FIIG Securities. Just 16% of Australian high net worth individuals (HNWI) are investing directly in corporate bonds, and of those investors, corporate bonds make up just 11% of their portfolio. HNWIs are classified as individuals with more than $2 million in investable assets.
A bond is a form of loan that a company requests from investors in order to fund its growth or daily operations. Like any loan, the company promises to not only return the investors' initial deposits but to also pay interest on the amount borrowed along the way, which are known as coupons. Corporate bonds are issued by both financial and non-financial institutions rather than a government organisation.
While corporate bonds may be flying under the radar for a lot of Australian investors, this is not to say the market isn't sizable. The Australian corporate bond market is currently worth more than $1 trillion, a size representing around 70% of the Australian stock market. However, according to the new report commissioned by FIIG Securities, less than half (47%) of the Australian corporate bond market is owned by local investors, with 53% of the market owned by overseas investors.
This is on an upward trend, with the report predicting the number of local HNWIs invested in corporate bonds could double in the next 12 months alone. According to the report, 15% of non-investors intend to invest in the assets class within the next year, which would increase the share of HNWIs invested in corporate bonds from 16% to 29%.
"The investment culture here in Australia is heavily skewed towards equities and property. We seem to have this love affair with equities," said managing director at FIIG Securities Jim Stening.
"The report highlights that an increasing amount of investors are realising the opportunity that corporate bonds present. 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 Stening.
Why are more investors starting to look to corporate bonds?
Corporate bonds are seen as somewhere in-between term deposits and equities; they generally offer higher return than term deposits; however, they are far less risky than shares. The Corporate Bond Report 2018 reveals the main reason why investors include corporate bonds in their portfolio is because they provide a regular and reliable income stream. Corporate bonds pay regular interest on fixed dates, so investors can predict down to the cent what they'll get paid and when.
Additional reasons for investing in bonds include portfolio diversification, the returns and the defensive nature of the asset. Among those who aren't yet investing in corporate bonds, 70% said they had insufficient understanding of the product, while 38% simply weren't aware of the asset class.
Author of the report and Deloitte Access Economics partner John O'Mahony said, "Investors highlighted the low yield environment for cash investments as their number one concern, and an increasing awareness of corporate bonds as an alternative fixed income investment option will support growth in private investor demand."
"The corporate bond market is a very significant opportunity in Australia. We think it's a story that hasn't been told. It's been growing somewhat under our noses," said O'Mahony.