Tuesday 20 November 2018 by Elizabeth Moran Education (basics)

Myth #5. Managed funds are better than investing direct - in bonds

Reality #5. If you invest direct, you have control over which companies you invest in, when you buy and sell bonds that may influence tax, the benefit of knowing when interest will be paid to you and how much will be paid. You can also take advantage of the natural maturity of bonds to have capital returned to you.

facsts-myths

Traditionally, the over the counter Australian bond market operated in minimum transaction sizes of $500,000 per bond, making the market inaccessible to smaller investors. While $500,000 is still the standard sized transaction, FIIG Securities opened up the market in 2010 when it broke down the $500,000 bonds into smaller parcels.

Retail and wholesale investors can now invest in the over the counter, institutional bond market from $10,000 per bond with a minimum upfront investment of $250,000. In theory, this means investors could have 25 x $10,000 holdings.

If you invest direct, you have control over which companies you invest in, when you buy and sell bonds that may influence tax, the benefit of knowing when interest will be paid to you and how much will be paid.  You can also take advantage of the natural maturity of bonds to have capital returned to you.

At FIIG, many of our expert staff have been trained internationally and we provide a comprehensive service, including:

  • Credit Research relevant to your portfolio sent directly to you
  • Dedicated separate investment strategy group
  • Sought after market leading educational services
  • Three weekly publications – The WIRE (Thursday 7am), Special WIRE (Saturday 7am) and Smart Income (Monday 11 am)
  • State of the art reporting
  • Online trading and daily valuations if needed
  • Owned and operated by Australians for Australians

Unlike managed funds where you pay ongoing management, and possibly performance and entry or exit fees, the cost to invest in the over the counter bond market is largely built into the rates of return a broker shows you.

Aside from brokerage, which is paid on every over the counter bond market transaction, at FIIG we also charge an account based custodial fee starting from 0.2%pa sliding down as the size of the portfolio increases.

Custody service fee Aggregate value of the client's assets
0.20%pa For the first $500,000
0.14%pa For the next $1.5m
0.09%pa For the next $3m
0.06%paFor amounts over $5m 

Source: FIIG Securities

There is a limited range of bonds offered on the ASX, including government bonds and some in a trust structure known as XTBs. Many investors mistakenly think hybrids, more often traded on the ASX, offer similar protection to bonds but are far more complex and considerably more risky.

If you invest in managed bond funds you lose many of the benefits of direct investment. Importantly, most managed funds may only disclose the top 10 investments, so you don’t know what they’ve invested in.

Your investment is in a unit based fund where you have to decide to sell the units to recoup your capital so you lose the natural maturity that bonds provide.

The minimum investment in DirectBonds through FIIG Securities is typically $10,000 and minimum portfolio of $250,000, which is higher than managed funds.  Some managed funds are available from $20,000, but if you can afford the higher initial investment, you get a relationship manager to help look after your portfolio, a range of experts you can talk to and importantly you’re often investing in the same investments as the fund managers but you keep control.



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