With ongoing uncertainty in global markets, investors are increasingly seeking refuge in assets that can provide a greater degree of stability and peace of mind.
In recent times, corporate bonds and other fixed-income securities have often been overlooked in favour of more ‘glamorous’ asset classes like equities which have posted double digit returns on average over the last 10 years.
However, with interest rates materially pushing up the cost of capital, we have now entered a new paradigm where the outlook for expensive growth assets is less certain.
Conversely, we have witnessed demand for corporate fixed-income securities become increasingly more popular as investors seek to lock in attractive returns while also benefiting from greater capital stability.
This article explores some of the benefits of corporate fixed-income and outlines various points for advisers and their clients to consider.
Regular Income Stream
One of the most attractive features of corporate fixed-income securities is their ability to provide a regular and predictable income stream.
When you invest in this asset class, you are essentially lending money to a corporation in exchange for periodic interest payments. This fixed income can be particularly valuable in times of uncertainty when stock market fluctuations can reduce the reliability of dividends and capital gains (which you receive when investing in shares).
Relative Safety
Corporate fixed-income securities are generally considered less risky than equities. This is because they represent a contractual obligation between you and the issuer of the security to make periodic interest payments (coupons) and pay to the face value of the security to the investor upon maturity.
While there is still some level of risk involved with investments in bonds and other fixed-income securities, (because companies can default on their debt obligations), this risk varies depending on the credit quality of the issuer. Credit risk can therefore be minimised by investing in higher quality companies that are less likely to default.
Diversification Benefits
Diversification is a fundamental component of risk management within investment portfolios and including corporate securities can play a pivotal role in enhancing overall returns relative to traditional stocks and bonds.
Various Risk Profiles
With thousands of corporate bonds and other fixed-income securities available on the market, investors have a wide range of risk profiles to choose from.
From senior secured debt to subordinated debt,there are many tailorable investment opportunities which are dependent on specific risk appetites.
It is the diversity which makes corporate fixed-income securities a useful and desirable asset class, especially during volatile and uncertain times.
How the Australian Bond Exchange Can Help
Inclusion of corporate fixed-income securities in a portfolio can enhance portfolio stability during uncertain economic environments. This, combined with regular income generation (through coupons), portfolio diversification benefits and an inverse relationship with interest rates, makes them a valuable asset class.
For more information about how corporate fixed-income securities can work within investment portfolios, contact an adviser at the Australian Bond Exchange today.
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.