Published in The Australian 26 September 2015
The latest Australian Taxation Office statistics show Australian self-managed super funds are massively under-allocated to defensive assets despite high cash and term deposit holdings
The data released last week, for the quarter ending June 30, showed that the allocation to cash and term deposits increased by 1.2 per cent to 26.7 per cent or $157.7 billion and the allocation to debt securities also increased by the same percentage to 1.17 per cent of all assets or nearly $7bn.
Combined, the SMSF allocation to defensive assets is just 27.9 per cent, significantly lower than the average proportion of defensive assets held by pension funds in the 29 countries that are members of the OECD.
The 2014 OECD Pension Funds in Focus report shows that the average allocation to bills and bonds, excluding cash, was a substantial 52 per cent across all 29 countries, far exceeding the very small 1.17 per cent allocation to bonds of Australian SMSF investors. Australian SMSF’s very high relative investment in cash somewhat compensated, raising the overall allocation of their defensive assets, but they still fell well short of the global average.
Australian SMSFs continue to largely shun bonds and I think there are two reasons. The first is a lack of appreciation of the stability and certainty that bonds provide and how crucial this is to those planning a self-funded retirement. The second is uncertainty about how to buy them.
Bonds are low-risk investments as they are legal obligations of the companies issuing them. Companies must pay interest and return capital on the dates specified in the prospectus. In that way retirees can plan to match living expenses with interest and maturity date payments, providing much needed certainty. It is still not easy to access bonds in Australia. A limited number of Commonwealth government and very low risk corporate bonds have been made available through the ASX. However, the vast majority of bonds are traded in the over-the-counter market and are only available through a dealer or broker. It is worth finding one to help you increase your allocation to this important but overlooked asset class.
If we invest approximately $320,000 in bonds from six companies — Asciano Finance, Dalrymple Bay Coal Terminal, Downer Group Finance, Genworth Financial Mortgage, Qantas and Sydney Airport — we can generate a yield to maturity of 4.83 per cent per annum, excluding fees. This is a low-risk bond portfolio. All six bonds are rated by the credit rating agencies and five are rated as investment grade.
| Company | Maturity/Call date | Bond type | Yield to maturity | Income (Running yield) | Investment value |
| Asciano Finance | 2025 | Fixed | 4.69% | 5.03% | $52,169 |
| Dalrymple Bay Coal Terminal | 2021 | Floating | 4.46% | 2.68% | $45,994 |
| Downer Group Finance | 2022 | Fixed | 4.36% | 4.47% | $50,386 |
| Genworth Financial Mortgage | 2016 | Floating | 4.19% | 6.76% | $50,999 |
| Qantas Airways | 2022 | Fixed | 5.32% | 6.83% | $56,719 |
| Sydney Airport Finance | 2030 | CIB | 5.69%* | 3.15% | $62,251 |
Source: FIIG Securities
Note: Prices accurate as at 23 September but subject to change
*Assumes inflation is 2.5 per cent per annum
Returns exclusive of fees
Black = retail and wholesale, red = wholesale only
Depending on your risk appetite, higher returns are available of up to 7 per cent per annum. While many clients are happy to hold bonds until maturity, they can be sold prior to maturity.
Bonds provide the middle ground many investors are looking for. They are slightly higher risk than term deposits and offer slightly higher returns. They are much more stable than shares and more predictable than property.
Global best practice suggests SMSFs should have much higher allocations to bonds, which make up the bulk of OECD pension fund allocations.