A spotlight on fixed income
All asset classes have their day in the sun. We are all familiar with the current property boom and even equities markets have performed well in recent times. Given the performance these growth assets have seen in recent years the fixed income players may have fallen under the radar for many investors. Is fixed income still valid in your portfolio? Let’s take a little look at this asset class.
Fixed income includes assets like bonds, term deposits and floating money markets. A bond is just a loan or an IOU. Bonds are also called fixed income securities because the cash flow from them can be fixed. The issuers of bonds are governments and corporations.
A bond is characterised by its face value (the bonds principal that is to be returned on the maturity date or repaid over the life of the bond), the coupon (which is the interest rate or yield that the issuer agrees to pay to the bond holders), the term (maturity is the date that the bond’s principal must be repaid) and the issuer (the entity which is borrowing the money).
The type and quality of the bond issuer is an important characteristic of a bond. The issuers stability is the investors main assurance of getting their money back. For that reason government bonds are considered the “safest” bonds, followed then by corporate bonds. However, bonds are not risk free, it is always possible for the borrower to default on the debt payments, especially in the case of corporate bonds.
Bond pricing has 2 areas an investor needs to consider. The initial price of the bond, known as its face value is set when the bond is first issued to the market. This is also the amount of capital that will be returned to the investor at maturity. The second area of pricing related to how it trades on the secondary market. When interest rates rise the price of a bond falls and vice versa. If an investor plans to hold their bond until maturity the don’t need to worry about price movement on the secondary market as they will be repaid their principal in full at maturity (as long as there is no default). However, investors looking to sell their securities sooner need to know more about the secondary market. It’s worth noting that Australian investors lack options when it comes to fixed income, as minimum parcel sizes start at $500,000 this makes it hard for the average person to invest. Professional managers are generally used in this space and whilst a bond may seem simple to understand at first glance there are enormous complexities that come to play in this space when it comes to secondary markets.
As with all investments and managers we look for a well-diversified approach to investing and strong management experience and the fixed income market is no exception. Fixed Income provides many benefits to a portfolio depending on your life stage and your tolerance for investment risk. Capital stability and regular reliable income can help to meet an investors needs and fixed income provides diversification from equities and property markets. Generally fixed income investments should provide a return premium over cash and term deposits.
As always, we recommend you seek tailored advice to ensure your investments are suited to your current circumstances. All investments require research and risk assessment on a regular basis.
This information contained in this document has been provided as general advice only. The contents of this document have been prepared without taking account of your personal objectives, financial situation or needs. You should, before making any decision regarding any information, strategies or products mentioned in this document, consult with your GPS Wealth Ltd financial adviser to consider whether it is appropriate having regard to your own objectives, financial situation and needs.