Fixed interest: ‘More interest’ needed to balance investment portfolios

— 1 minute read

Investing in fixed interest, such as government, semi-government and corporate bonds, is a mystery to many self-directed investors, according to our recently released detailed Legg Mason Global Investment Survey 2018.

Andy Sowerby

It may not be a surprise but, Australian investors’ current bond allocation remains low by global standards – the survey reported average asset allocation to bonds in Australia is 15.7 per cent versus global 17 per cent and Americas 21.5 per cent.

More alarmingly, the survey found 58 per cent of the direct (unadvised) investors that were interviewed had absolutely no fixed income holdings at all. This is despite conventional portfolio theory dictating that fixed interest should be part of a well-diversified portfolio and should be a foundation of any retirement savings pool. On a macro level, only 12 per cent of Australia’s self-directed super pool is allocated to domestic fixed interest, down from 13.6 per cent three years ago. When you combine this with cash, term deposits and global fixed income, this exposure rises to 30.6 per cent which is low in comparison to the average exposure for pension markets in OECD countries of 51.4 per cent.

High-quality fixed income can add much to a broader portfolio due to its low correlation to growth assets, its low risk attributes and the contractual nature of future income payments. 

And besides its low-risk nature, fixed interest can also play an important role in managing ‘sequencing risk’ – the risk related to transitioning from an accumulation orientated investment strategy (while you work and save) to a decumulation approach (as an investor moves into retirement).  

At the most extreme end, consider the idea of this transition to retirement occurring at a time of a market crash, when riskier assets such as equities are at significantly reduced valuations (think immediately post GFC). Including an exposure to a low risk portfolio of high quality fixed income assets, that also produce solid regular income payments, may help ensure that there is enough regular cash available to avoid the investor having to sell equities/property (i.e. riskier assets) at deflated prices thus giving time for these assets to recover and help fund retirees long into their golden years. 

So why are Australians so underweight in this important asset class? Undoubtedly, one reason for the low levels of fixed interest holdings is that investing in bonds is not nearly as convenient, nor accessible, as investing in equities. Buying direct exposure to bonds is prohibitive for most due to the high minimum investment required, sometimes as high as $500,000 to buy one single security.  Secondly, perhaps partly due to low levels of perceived demand, product innovation has been slow to meet the need of investors who prefer to trade via the ASX – at least until now. 

In recent times, we have witnessed accelerating demand for fixed income solutions on the ASX, especially in the form of passive and rules based Exchange Traded Funds (ETFs) which have received over $1 billion of new flows in 2018 alone, and Listed Investment Companies (LICs) that have received substantial support in the past year. The increase in demand is the result of many factors including the substantial fall in Term Deposit rates, heightened concerns about current equity market valuations, increased geopolitical risk and the move of the baby-boomer generation into retirement. 

And most recently investors now have a proven, simple and convenient pathway to add quality fixed income exposure to their portfolios: the BetaShares Legg Mason Australian Bond Fund (managed fund) (ASX: BNDS) – the first fixed income Active ETF to be launched on the ASX.

This marks a further evolution of the local fixed interest offerings. BNDS is designed to give investors, especially unadvised or self-directed investors, access to the benefits of a broad fixed-interest portfolio that is actively managed by one of the world’s leading fixed income managers, Western Asset Management, arguably the premier fixed-interest team in Australia, led by veteran portfolio manager Anthony Kirkham. Attractively priced at just 0.42 per cent* per annum this fund can be traded though your brokerage account for amounts as low as $100 – a true democratisation of this previously hard-to-access asset class.

We are confident that the launch of BNDS will help contribute to a greater awareness of fixed interest investing enabling improved access and greater choice, particularly for those SMSF trustees and members who call their own shots.



Andy Sowerby, Managing Director, Legg Mason Australia and New Zealand



Fixed interest: ‘More interest’ needed to balance investment portfolios
Andy Sowerby
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Eliot Hastie

Eliot Hastie

Eliot Hastie is a journalist at Momentum Media, writing primarily for its wealth and financial services platforms. 

Eliot joined the team in 2018 having previously written on Real Estate Business with Momentum Media as well.

Eliot graduated from the University of Westminster, UK with a Bachelor of Arts (Journalism).

You can email him on: [email protected]

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