There is rising demand for corporate bonds from Australian high net worth individuals (HNWI) as investors acquire a better understanding of these instruments’ potential portfolio value, a new report has revealed.
The Deloitte Access Economics “Corporate Bond Report 2018”, commissioned by FIIG Securities, surveyed over 700 HNWIs comprising individuals with more than $2 million of investable assets.
It found 16 per cent of HNWIs in Australia have direct holdings of corporate bonds, with 86 per cent of those investors indicated a positive experience.
In addition, 37 per cent of direct corporate bond holders expected to reinvest in the asset class while 15 per cent of non-investors were planning to invest for the first time in the next 12 months.
From these findings the report predicts the share of HNWIs with corporate bond investments to grow from 16 per cent to 29 per cent over the next 12 months.
The report said the ground swell of engagement in the corporate bond market was driven by a number of factors for investors including good returns given risk profiles, capital preservation and a reliable income stream.
In addition 40 per cent of those surveyed cited concerns about future changes to taxation and superannuation policies and that the lower political risk posed by corporate bonds could therefore support future investment in the asset class.
“We’re at a point of inflection where we’re starting to get enough choice available to investors and they’re starting to respond to that choice,” FIIG Securities managing director Jim Stening said during the launch of the report.
“The way this capital market has developed has meant those opportunities haven’t been there and I think that’s what’s coming for the Australian market – more and more choice.
“The interest is most definitely accelerating.”
Stening said the report highlights an increasing amount of investors are realising the opportunity that corporate bonds present.
“Providing strong returns, a reliable income and historically outperforming shares during economic downturns, investors are beginning to tap into corporate bonds as a vital part of a well-balanced, diversified portfolio,” he noted.
The report found 38 per cent of non-investors listed a lack of awareness of the benefits of bonds as a key marrier to investment.
Deloitte Access Economics partner and report author John O’Mahony added: “Investors highlighted the low yield environment for cash investments as their number one concern [affecting their investment decisions], and an increasing awareness of corporate bonds as an alternative fixed income investment option will support growth in private investor demand.”
The report also highlighted more than $1 trillion of corporate bonds are outstanding in Australia.
Australia’s corporate bond market is around 70 per cent the size of the local listed share market.
The report said the average gross annual return of Australian bonds was 6.1 per cent between 2006 and 2016, compared to 4.3 per cent for Australian shares.
Corporate bonds make up 11 per cent of total portfolio assets for individuals with direct holdings.