With interest rates at historic lows and the ASX 200 trading at record highs, it seems to be the right time for Australian investors to consider alternative options in their hunt for returns.
One option overlooked by many investors with cash to deploy, particularly those with SMSFs, is fixed income assets, such as bonds, which preserve the face value of investments and ensure a fixed rate of return.
According to Capital Prudential Funds Management managing director Samuel Moore, only about 2 per cent of investments allocated by SMSFs are to fixed interest assets, one of the lowest levels anywhere in the developed world.
Moore noted this underweight allocation may simply be due to the relative immaturity of the sector in Australia.
“There are strong reasons why investors should consider putting a higher weighting to bonds,” he said.
“They include capital preservation at the end of the bond term when you get your face value back, so you’re not subject to market fluctuations. And then the fixed interest income stream you receive as well.”
One deterrent for some investors has traditionally been the relatively low yield of government bonds, however, a range of other instruments are now available that offer non-investment-grade bonds with higher yields, including bonds issued by investment funds such as Capital Prudential.
“Our bonds work the same way as other bonds, such as government and corporate bonds, except that they are high yield because they’re non-investment grade, whereas sovereign bonds are investment grade,” Moore explained.
The fund operates by raising money from issuing bonds to investors for one, two or three-year terms, paying a fixed interest rate of 6, 7 or 8 per cent respectively.
Capital raised is used to purchase, develop and then sell residential and commercial property, primarily in Adelaide, which grows the value of the fund. The investments are diversified across a range of properties that are bought and sold in the same market, mitigating the risk of volatility to which other investment vehicles, such as property syndicates, may be exposed.
Moore pointed out the manager has targeted the Adelaide property market for specific reasons.
“The South Australian residential property market has lower volatility than Sydney and Melbourne – the prices don’t jump around as much so it’s a good asset for a fund that’s issuing bonds,” he said.
Further, the manager possesses a sound understanding of the region given the business originated in Adelaide and remains headquartered in that city.