Retail investors in Australia have been able to directly invest in corporate debt and other debt capital instruments for the past two years, but take-up has been scant because of the high costs, according to a Perpetual funds management executive.
Although interest in senior, subordinated and hybrid debt is growing, retail investors are, in the main, hostage to prices set by large institutions, keeping corporate bonds and other debt issues expensive relative to equities.
Perpetual income and multi-sector group executive Richard Brandweiner said debt issues were a poor fit with the traditional advice model, particularly for investors who were less than affluent.
“Generally the advice proposition that is provided to them is provided around managed funds for very good reason. It allows investors to pool with others and get the benefits of scale and professional management,” Brandweiner said.
He said equities were better suited to direct retail investment because investors needed a far smaller number of securities to get broad exposure.
“For example, in equities you only need 15 stocks to give you proper diversification, but in fixed income you might need 100 to 200 securities,” he said.
“That’s because the upside is limited to your yield and the downside is all your money, whereas in equities you can double, triple, quadruple your money. Because of that, bonds don’t suit mass advice.
“Actually, managed funds make enormous sense for people in fixed income because they allow small investors to actually get the benefits of proper scale, institutional pricing and proper diversification.”
He said the bulk of retail money was going into term deposits despite the emerging retail senior bond sector.
“As you see term deposit rates start to come down relative to bank bills, which is what you’re already starting to see, and as the appetite for different types of fixed-income securities grows, we should start to see that build up a bit.”
