The rising life expectancy of Australians and the rapid growth in self-managed super funds (SMSFs) are fuelling a resurgent interest in fixed-income investment for financial planners and their clients. As a key defensive asset class, bonds are particularly important for investors requiring a reliable income stream and stable growth.
“They’re looking at the risk of their capital and saying, ‘it needs to last the distance’,” says Grant McCorquodale (pictured), head of private clients and intermediaries, FIIG.
“This is where I see the retirement income policy landscape in Australia, because in one generation, you’ve got people living 14 years longer.”
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McCorquodale refers to data that shows average life expectancy in 1970 was 71 years; “now it’s 85, and in 10 years it will be 90. It means people need to ensure their money lasts the distance”.
He sees strong outflows of cash from term deposits into the equity markets as retirees attempt to boost capital growth and ensure their money lasts long enough.
“While the markets were correcting themselves strongly, every client said ‘show me the cash flows, reassure me they’re robust because that is what I need to live on each day’,” he says.
“People have an income line and an expense line…the income line needs to be more robust than their anticipated expenses. It’s an important question for SMSF trustees, to make sure they’ve got exposure to the fixed income market, to make sure they’ve got certainty around their income streams.
“What they really want is bonds, but they’re getting equities.”
Financial planners and bonds
To better facilitate clients’ access to fixed- income products, financial planners need more seamless, ready access. Traditionally, direct bonds are not traded via stock exchanges, but primarily through over-the- counter trades.
This is a key difficulty alluded to by David Middleton, a director of Adelaide- based financial planning business, Middletons Securities.
“We’ve found the process of accessing them a bit clunky, a bit opaque,” he says.
Despite this, in recent years Middletons has increasingly been making bonds available to its clients.
“We’ve been very interested in some of the index bonds, because they’ve been very cheap, [with] running yields of 3.4 per cent. You were essentially getting the inflation protection for nothing,” Middleton says.
View from the ASX
A general lack of understanding of the bond market is a key constraint on greater expansion of the market, according to Ken Chapman, head of debt capital markets at the Australian Securities Exchange (ASX).
He believes that to be providing the best advice, there is an imperative for financial planners to understand fixed-income products in the same way they need to understand equities. He also says that they need to be able to access the market – not only to see prices, but to obtain detailed, timely credit reports.
“They need to be able to access fundamental data about the issuer, to see where the particular debt instrument sits in the credit structure,” Chapman says.
