The availability of bond products through the Australian Securities Exchange (ASX) will increase SMSFs’ allocation to the asset class and provide necessary negative correlation to equities in portfolios.
According to Rice Warner research, SMSFs currently allocated 1 per cent to debt securities compared to 31 per cent allocated to cash.
Morgan Stanley Wealth Management vice president Hamish Foletta said there was a lack of understanding by SMSFs of the role of fixed income.
“When you look at SMSFs and why they have such a large portion of cash versus fixed income, to me a massive component of it has been the lack of accessibility,” Foletta said at a recent S&P/ASX Fixed Income Seminar.
“So to have ASX-listed bonds would be a huge leap forward and I think that’s where the floodgates will open.
“In terms of bonds versus cash, one of the biggest advantages that I see in a portfolio sense is the negative correlation that bonds will give you to equities.”
Commenting on fixed income asset allocations by SMSFs being virtually zero, he said there was a very clear distinction between bonds and cash.
“But a lot of SMSFs probably are happier to tolerate a greater level of volatility in their fund perhaps because they have generally a larger portion of money in there,” he said.
“So if they’re lucky enough to have $1.5 million giving them an average yield of 5 per cent across the portfolio and that’s enough for them to live on, they’re not so concerned about whether that $1.5 million goes to $1.3 million or $1.7 million.
“The negative correlation factor perhaps isn’t as great, so they stick with a term deposit.”
The industry was waiting for the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 to be passed by parliament.
It’s intended to promote a deep and liquid retail corporate bond market that is an alternative source of funding for Australian companies.
ASX head of debt capital markets Ken Chapman said the exchange was talking to all industry stakeholders about its depository interest technology that enabled wholesale bonds to be accessed by retail investors by linking Austraclear, the central securities wholesale depository, and CHESS, the retail registry.
Corporate issuers will be able to issue a bond either directly on the ASX using the simple corporate bond prospectus legislation or alternatively issue their bond wholesale and elect to have the bond accessible to retail through a transmutation process, which will move the bonds from Austraclear to CHESS.
“SMSFs are investing in these bonds, either through the bond depository interest or direct bonds, exactly the same way they buy shares,” Chapman said.
“So there is absolutely no difference in the actual process of investment for the investor.
“The big problem with this market is critical mass – how do you create a market that’s got sufficient investment alternatives to make it attractive for investors?”
He said if an issuer chose to have their bonds transmutable, it would allow retail and SMSF investor access not only to new issues they bring to market, but also access to bonds that already exist.
“We’re potentially in a very exciting stage of creating a critical mass in terms of the product or the range of bonds that will be accessible,” he said.
