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'Perfect storm' for corporate bonds

by Robin Christie | 15 May 2015

As GFC-wary retail investors continue to think more about introducing fixed income products into their investment portfolios, the corporate bond market could be set to quadruple in size.

According to Australian Corporate Bond Company CEO and co-founder, Richard Murphy, there has been "the coming together of a perfect storm for Australian investors and the Australian corporate bond market".

He said that the GFC caused investors to rethink their strategies and focus on capital security, yield, proper asset class diversification, and outcome focused investing. This mindset, he said, has led them towards fixed income investments – and the appetite for corporate bonds is growing.

"This thinking is becoming much more embedded in financial adviser’s and broker’s asset class diversification models and model portfolios for individual investors," he said. However, he added that Australia has traditionally lacked a retail corporate bond market, meaning that corporations have relied predominantly on the wholesale market to sell their bonds.

"This has locked out many individual investors from accessing bonds from many of the same companies that they may be shareholders in," he said. "According to the Murray Review, given the size and sophistication of Australia’s financial system and economy, we should have a $400 billion corporate bond market, combining wholesale and retail investors; instead of the $100 billion one we currently have."

Investing through the ASX

With these thoughts in mind, he explained that ACBC launched a series of ASX listed exchange traded bond units (XTBs) last week in an effort to offer retail investors access to fixed returns from the wholesale corporate bond market. According to Murphy, there is a gaping hole in the market in terms of the breadth of fixed income investments currently available to individual investors on the ASX, which he hopes the new XTBs will fill.

"Until now individual investors, including many SMSFs, have been heavily reliant on term deposits for predicable, stable returns. But with interest rates at historical lows, and expected to remain low, we saw a definite gap in the market and have identified a solution that can form part of the broader development of the corporate bond market," he said.

He explained that 17 XTBs have been launched to give investors exposure to the returns from individual corporate bonds issued by top – and more are in the pipeline. The XTBs are ASX tradable securities that track the performance of a specific underlying bond – after fees and expenses. Each unit is held in a trust, and is underpinned by the relevant bond. So far, underlying bond issuers include BHP, Crown, Lend Lease, Mirvac, Stockland, Telstra and Wesfarmers.

Having earmarked corporate bonds as a growth market in the retail investor space, Murphy conceded that education will have to play a big role in promoting this growth. "There is clearly work to be done around educating the market and we’ll invest in this area to ensure more Australians can reap the rewards of a flourishing corporate bond market," he said.

A disruptive force?

Murphy went on to point to Lonsec research into XTBs, which stated that, despite there having been much discussion between market participants over a number of years, "there has been little action in opening the Australian corporate bond market to retail investors".

Describing XTBs as a "significant development", the research notes that they are "a legitimate means of eliminating some of the barriers faced by retail investors seeking to access the Australian corporate bond market".

While Lonsec stopped short of using the 'disruption' buzzword, Open Markets CEO, Rick Klink, had no such qualms. Describing XTBs as "a disruptive innovation in the Australian investment landscape", he said that they provide exposure to an asset class "that has previously been restricted to wholesale and institutional investors".

In terms of the type of investor that was likely to be interested in this type of investment, he added that, with support and data feeds now provided to all major portfolio software providers, "we believe XTBs are likely to be of interest to self-directed investors, advisors and financial planners alike".


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