Where to next for fixed income?
ifa, in partnership with FIIG Securities, invited a cohort of advice practitioners to a leadership luncheon roundtable about fixed income. How do they use it in portfolios? What do their clients think about it? Where are markets likely to go next? ifa contributor Tim Stewart led the discussion
ON ASSET ALLOCATION
pw - One of my clients has got a private banker in Europe and he’s always astounded at the Australian market versus the European market. I think because it’s a lack of necessary knowledge and also the diversification aspect. So, his private banker would put him in single issuing bond. It’s very actively managed by private bankers, so from a legislative perspective I might go in and take a yield and then as soon as something happens you’ll be able to get it out without actually having to do a statement of advice. He’s very active in that.
In the Australian market, it’s advisers. That’s [bonds] one part of what you’re actually doing with a client. It’s a purposeful decision on how active you actually want to be in there. And also, you’re getting a pretty good return for dividends – it grows. The coupon depends where we are in the interest rate cycle. It’s developed from fixed and floating over the last 15 years, so you can mitigate that interest rate risk. If it ain’t broke people don’t want to fix it. They don’t want to change as advisers.
tf - I’m on their side. I think the mystery is: why is everyone else’s allocation to equities so low? Most of their savings is financing retirement. Typically, in the old days, you used to retire and die within a few years. But these days you probably get 30 or 40 years. I’m not sure if it’s the growth income thing. You’ve got the time to get the high returns that tend to come with equities. And so, the mystery for me is why are people sort of loading up with the government bonds that pay negative interest rates? Why would you bother? So, my sense is Australian businesses have gotten it more or less right, the mix between bonds and equities. The questions I have are more about how do they actually go about putting it together?
pm - That would be right with SMSFs, because most of those are not actively managed. I mean, they puff their chest out and walk around saying they’ve got a self-managed super fund and they don’t even know what it is. Or if they put a couple hundred grand into term deposit and the accountant’s made five grand by setting one up, charges for an annual audit, well, they’re no better off. I mean, that’s a false way, I think, to look at the pot with the SMSFs. The fair wedge of those are uneducated and not proactively managed accounts.
js - I think in that circumstance they need good advice.
ON CORPORATE BONDS
ts - So Tim, you talk about government bonds and that’s one thing, but what about the understanding of corporate bonds by Australian investors?
tf - My sense of advisers is they make the decisions between equities and don’t spend nearly as much time thinking about how to invest in the secure part of the portfolio. Where do they go down the credit spread? Is it all going to be in hybrids? Is it a mix of different things? How do you make the most of your opportunities? My sense is the approaches are pretty lazy in a lot of advisers.
ts - It sounds like there is a lot of laziness. The SMSFs have got 25 per cent of their portfolio in cash and they’re lazy, and there’s some complacency on the part of advisers when it comes to things like corporate bonds.
tf - Better to call it inertia.
pw - It’s about how to do it. So, most people grow up and they know how to buy property. You go to a real estate agent. You go see a solicitor to do the conveyancing, you go to the bank to get the money and it’s done. Then the real estate agent does it. They don’t actually have to think about that. There’s a lot of Australians that actually have CBA shares and IAG shares and NIB shares that still have them because they don’t know how to sell them. They actually don’t know how to open an account. That’s something that’s been around for a while isn’t it? We’re talking about how people understand corporate bonds.
The other part with bonds is where we are in interest rate cycle. Just if it’s fixed. Then you’re actually mark to market and the price goes down. Not many investors understand that concept; no matter how much you actually put in the money section of The Sydney Morning Herald and all magazines and so forth. They don’t understand. You watch a client’s eyes glaze over when you talk about bonds and inverse pricing – that yields go up as prices go down. They’re in Bali. They don’t understand. They don’t care because they are paying the adviser to manage all that and they don’t want to lose money. It’s all about education and investors generally don’t want to hear it. They only want to hear that Woollies is actually making a profit so they get a better dividend and the price goes up.
js - I’ve been interested in your conversation you’ve had with your clients. The ASX peaked at 6,700 in July of 2007. It’s scratched over 6,000 10 years later. Dividends have essentially cropped up. If you bought the index you are still 10 per cent underwater. How do your clients feel about that? Do they even know that?
pw - The issue is where we are at in the cycle right now. Most people who were whinging during the GFC around having not enough cash, when I’m telling them to actually have more money in their cash bucket they’re bucking and squealing because they don’t see that they actually need it. So, they’re educated clients who went through the GFC, long-term clients of the firm and I’m having to argue with them to put more money in cash, put hay in the shed for down the track. Most investors have actually forgotten about the GFC.