Large corporate bond parcel sizes in Australia are deterring SMSF investors from playing in this space, with many opting for exchange-traded funds (ETF) instead, according to an investment firm.
Fixed income investment firm and Legg Mason affiliate Western Asset Management portfolio manager Anthony Kirkham said the high minimum spends of $500,000 lock SMSF investors out of any high-grade corporate bonds, which poses a significant challenge.
There are also restrictions on the way SMSFs can purchase bonds and the volume they can buy, particularly in the credit space.
“They’ve used surrogates or other alternatives to actually invest what they thought were surrogates for bonds,” Kirkham told a global bonds media briefing in Sydney today.
“Organisations have found ways around that, but more broadly speaking I think exposure to true bonds has been a challenge.”
He also said the large parcel size reflects a structural issue in the Australian market.
“You’ve got the highest part of the capital structure, the most defensive asset class where retail investors can’t get access to, yet they can get direct access to an equity or a hybrid, which is a far more complex instrument, and they can access that freely at a minimum spend, which is tiny,” he said.
“Yet you need $500,000 to purchase an investment-grade credit, so it doesn’t make a lot of sense from that perspective and it doesn’t make a lot of sense from an SMSF trying to build a balanced portfolio that reflects their risk in their time of retirement.”
He said ETFs may have opened up and provided a “better” avenue for that marketplace.
“We’d hope to see them invest more in bonds and sleep better at night ultimately,” he said.
Western Asset Management is seeing a demand for actively managed ETFs among SMSFs and is increasingly conducting conversations in this area, with the firm stating it would be willing to become involved in the space should the regulator and the platform demand it.
“We think that actively managed ETFs are hopefully a way of the future,” Kirkham said.
He said global bond portfolios sat at about 4.5 per cent volatility and Australian bonds are around 3 per cent to 3.5 per cent volatility, but volatility in equities stands at about 13 per cent despite a structurally low volatility environment.
“I think without bonds SMSFs are going to take risk or they’re going to try and barbell a lot of risk and then put term deposits at the other end and the outcomes are not balanced,” he said.
