In late April, the giant US-based technology company Apple issued $US12 billion ($12.9 billion) of bonds. It was able to issue the securities at interest rates roughly comparable with the rates at which the US Treasury issues bonds. It was a clear signal by investors that they regard the creditworthiness of at least one major corporation very nearly as highly as they rate the creditworthiness of the US government.
The reasons for the Apple issue are complex – it’s believed Apple’s rationale is that it is significantly cheaper to raise debt in the US than it is to pay tax if it were to repatriate cash it holds outside the US – but investors didn’t care about that. They knew a good deal when they saw one.
The success of the issue also underlines the appetite among investors for high-quality corporate debt securities, as governments scale back bond issues of their own. In Australia the corporate bond market is relatively underdeveloped, but that is beginning to change as new rules start to affect the ability of banks to lend to corporate clients.
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Opportunities to invest in the domestic corporate bond sector are also limited, both by the narrow range of issuers, and the limited mechanisms for investors to access the market. One traditional route into relatively inaccessible asset classes – via managed funds – offers only relatively limited scope, too. Research group Morningstar covers six specialised corporate bond funds, and three of those are variations on the same product offered by AMP Capital. Other funds are offered by Colonial First State, and by Omega.
There is also an exchange-traded fund (ETF), the Russell Australian Select Corporate Bond Fund; and over recent years there have been a range of one-off, smaller funds, such as those created by Dixon Advisory for its own client base.
On the risk spectrum, corporate bonds sit between low-interest-paying but relatively secure government bonds, and riskier but potentially higher-returning equities. A report by the Australian Centre for Financial Studies (ACFS), published in late 2012, described corporate bonds as “the missing asset class”.
Key aspects of choosing a fund
David Carruthers, head of core and credit, global fixed income, for AMP Capital, says a key aspect of choosing a corporate bond fund is to look at the track record and the experience of the management team. Ideally, they will have lived and managed money through several market cycles.
Right now, Carruthers says, the focus of the AMP team is to “manage outright interest rate risk”.
“We have [a] shorter duration target for this fund because we think rates will tend to increase over time,” he says.
“We believe the RBA domestically, and certainly global central banks, are looking to increase interest rates. A lot of long-term duration funds will tend to underperform when rates increase. The key with corporate bonds, and what you’ll find with other funds, is we’re actually much shorter in duration, and we try to remove that interest rate sensitivity. If you’re looking at key aspects of different funds, it’s that ability to manage duration over time.
“I raise that [as an issue] right now. In the past, when rates were falling, it was good to have interest rate duration. But right now it’s important that you shorten that duration up.”
