Australian investors remain significantly underweight in fixed income assets compared with global peers, according to FIIG Securities director Jonathan Sheridan, who said allocations in Australia typically sit below 10 per cent.
Sheridan noted that similar economies such as Canada and the UK generally hold between 30 and 40 per cent in bonds, leaving Australian portfolios heavily skewed towards higher-risk assets.
“That means that 90 per cent of most portfolios may well be invested in more risky investments,” he said.
“It seems that the rest of the world is telling us that we should increase our allocation to fixed income,” Sheridan said, adding that bond yields are now “higher than they’ve been for decades” and offer income strength, capital preservation, and appeal amid geopolitical uncertainty and record-high markets.
“When you’re looking to protect your capital,” he said, “bonds are one of the best ways that you can do that.”
Sheridan said the fixed income environment has shifted markedly in recent years.
“We’ve moved from relatively low yields in the 2 – 3 per cent range … Now we are in an environment where those same high-quality liquid bonds can give you 5 – 6 per cent income, which creates a much stronger role for those sorts of assets in a portfolio.”
“It can be even higher if you engage in active management,” he added.
He also emphasised the broad range of fixed income investments available, offering diversification benefits.
As interest in private credit grows, Sheridan reminded wholesale and high-net-worth investors of the continuing advantages of active investment and direct bonds.
“Firstly, you’ve got your headline yield, which is what a bond would pay if you hold it to maturity. We’re getting 5 to 6 per cent out of high-quality liquid investment-grade bonds in the public markets at the moment.”
He noted that a bond’s return profile is not linear, stating that investors typically get a stronger performance in the first couple of years before easing, suggesting one might receive “an 8 per cent return in the peak years”.
“What we’re trying to do is actively capture that 8 per cent return in the first couple of years – and then move into a different bond, offering a premium at the start of its term.”
“This active management is key to maximising returns from fixed income,” he said. “So, while the headline yields that are being shown in the markets are typically of 5 to 6 per cent over the past couple of years, for our clients on average, we’ve historically returned 9 per cent* a year by using an active trading strategy.”
“This means there are potentially pretty strong returns available in the market for those who know what they are doing, noting that past performance is not an indicator of future performance, of course!”
