By adding bonds to to your portfolio, you can increase returns over deposits for a slight increase in risk, and improve cashflow
Charities and the broader Not For Profit (NFP) sector have never been under more pressure to maximise value from increasingly scarce capital. This is particularly so for investment committees managing the funds.
When considering asset allocation for NFPs, the middle ground between deposits and shares is bonds. Bond returns range from 2 to 12% per annum with a conservative portfolio generating 4 to 4.5% per annum.
All of Australia’s largest companies – and some smaller ones as well – issue bonds, as does the Commonwealth government and the states and territories. The government issues bonds to fund operations and invest in projects such as schools, roads and hospitals and other infrastructure development. Qantas, Sydney Airport, Woolworths and the four major banks are some of the companies you would recognise.
In their simplest form, a bond is a security that pays a defined distribution (the coupon) for a set period of time and repays the face value of the security at maturity. Unlike a share, a bond is a loan from an investor to the issuer of the security and is a legal obligation. There are many types of bonds, including fixed, floating, amortising and inflation linked.
Even though bonds are lower risk than shares, over the last ten years, bonds have performed better with the AusBond Corporate Index returning 7.21% versus the ASX 200 benchmark hitting only 5.48% for 10 year annualised returns in the same period.
Bloomberg AusBond Composite Index versus ASX 200 Accumulation Index Source: FIIG Securities, Bloomberg, ASX
For a NFP organisation, quantifying the risk of bond investment might be new territory, however ratings agencies provide a framework to help assess the risk of default. Investment grade bonds have a very low risk of default in Australia, with only three investment grade companies ever having defaulted.
Typically NFPs invest in bonds rated investment grade by ratings agencies: Standard and Poor’s, Moody’s, or Fitch.
As the bond market is a relatively under explored alternative for NFPs, some investors may be more comfortable enlisting the help of a professional. An experienced portfolio manager will be looking to maximise returns by trading on a day to day basis according to a set mandate. They’ll also be able to take advantage of economies of scale.
Individually managed bond accounts (that include rated and unrated bonds) managed by FIIG are an option. There are currently five programs with various manadates and for investments of over $5 million, we can work with you to develop a portfolio that complements your investment policy.
By adding bonds to your portfolio you can enhance your cashflow, as bonds can pay income on a monthly, quarterly or semi-annual basis, better matching income with known expenses.
For NFPs, bonds have the capacity to provide investment stability along with income to support a conservative, compliant financial strategy.
For more information on including fixed income in your investment portfolio, please call 1800 01 01 82.