Most retirees are looking for fixed income in their investment portfolio, even if they don’t realise that is what they are seeking, says Jon Howie, head of iShares Australia.
“When you ask retirees what their risk and return aims are, what they describe is usually what fixed income can offer,” he said.
“However most people don’t think about fixed income, such as bonds, when it comes to making investment choices, or if they do, they assume such investments are too hard and too expensive to access.
“Compared to other countries, Australian investors have a bias to equities and are relatively underweight in fixed income.
“For example, a recent study by the OECD* shows that Australian pension funds held just 8.8 percent of their investments in bills and bonds**, compared to 34.2 percent in the USA, 35.6 percent in Canada, 53.4 percent in Germany, or a massive 89.1 percent in the Czech Republic.
“It’s true that this asset class used to be very difficult to understand and complicated to invest in, which could be why individual investors are unlikely to consider it. It also required large outlays to access fixed income investments, requiring minimum investments of thousands and even hundreds of thousands of dollars.
“However this is no longer the case. There are now a number of options for people to invest in fixed income in a cost-effective and flexible fashion.
“Certainly in the current economic environment, holding some fixed income in a portfolio is a good basis for ensuring regular and reliable returns – something that is particularly important to retirees. So it is important that such investors reconsider fixed income in their portfolios.”
Mr Howie added that there are a number of misconceptions about bonds and how they work in a portfolio.
“Bonds and credit issued by companies rank highest in terms of repayment in the event a company becomes insolvent. They rank above hybrid securities, which in turn rank ahead of equity.
“One option that investors could consider is to use fixed income exchange traded funds (ETFs). They are low-cost and flexible, and provide good diversification, which can be tricky to achieve when investing in bonds. They provide a reliable income stream with less price volatility than other asset classes such as shares, and usually distribute income on a quarterly basis which can be useful for retirees.
“Furthermore, in comparison to cash accounts and term deposits, fixed income ETFs can offer a higher total return in an environment of falling rates, acting as a defensive part of investor’s portfolios,” Mr Howie said.
Fixed income was a key consideration in the most recent range of ETFs launched by iShares, the iShares Core. They comprises three equity ETFs and two fixed income ETFs that can be combined to provide global multi asset class exposure.
The iShares Core fixed income ETFs provide Australian exposure through the iShares Core Composite Bond ETF (IAF) and global exposure to over 3,000 investment grade corporate bonds through the recently launched iShares Core Global Corporate Bond (AUD Hedged) ETF (IHCB).
There are six iShares ETFs listed on the ASX that provide fixed income exposure. They are:
| ASX Code | Fund Name | Running Yield (%)# | FEES pa (%)^ | |||
| AUSTRALIAN FIXED INCOME | ||||||
| IAF | iShares Core Composite Bond ETF | 4.21 | 0.20 | |||
| ILB | iShares Government Inflation ETF | 1.76 | 0.26 | |||
| IGB | iShares Treasury ETF | 3.91 | 0.26 | |||
| INTERNATIONAL FIXED INCOME | ||||||
| IHCB | iShares Core Global Corporate Bond (AUD Hedged) ETF | 3.66 | 0.26 | |||
| IHHY | iShares Global High Yield Bond (AUD Hedged) ETF | 6.44 | 0.56 | |||
| IHEB | iShares J.P. Morgan USD Emerging Markets Bond (AUD Hedged) ETF | 6.28 | 0.51 | |||
# As at 18 May 2016.
^ Management fee as disclosed in the fund’s latest product disclosure statement or prospectus as applicable. Subject to change. Information presented as at 28 April 2016.
