Tuesday 11 December 2018 by FIIG Securities xmas-car Opinion

Christmas crackers: three bonds shaped to add value to a portfolio

Can you hear the jingle bells? Here are three attractive retail bonds – two investment grade and one high yield – for your fancy as higher deposit rates seem far, far away

As published in The Australian on 11 December 2018. 

The US Fed says interest rates may be getting close to neutral. What’s more, this key signal arrives just as our own 10 year government bond rate sits at just 2.75 per cent a year. That’s a low return for a 10 year timeframe. So there’s little hope of higher deposit rates anytime soon.

Taking the next step out along the risk curve, I suggest three attractive over-the-counter retail bonds, just in time for Christmas.

Two of these bonds are rated by credit rating agencies as investment grade and. Thus. are low risk. The third is high yield - you are being rewarded with a higher return for taking higher risk. As more investors seek the relative lower risk bonds, compared to shares, it’s getting harder to find value. While returns with such investments are low, risk and volatility are typically also low.

I’ve specifically chosen three different types of bonds one each of inflation linked, fixed and floating, so you can get a feel for what is available.

Sydney Airport 2030 Inflation linked bond

While you may already own Sydney Airport shares for their growth prospects, investing in the Sydney Airport 2030 maturity inflation linked bond will have a completely different purpose.

This will help protect your portfolio against inflation, which has the potential to destroy purchasing power. An annuity offers similar protection, but why not buy the bonds that the annuity providers buy? The Sydney Airport 2030 bond was issued at $100 face value in 2006, but the capital value has been compounding with inflation since and is now worth $133.

That’s the capital amount the company would have to repay investors if the bond matured now. Rising inflation would see the bond outperform, delivering higher returns with higher inflation and greater demand from investors seeking protection.

Roughly half of your return is in a fixed quarterly income payment of about 2.47 per cent per annum, while the other is the accumulation of CPI which is paid at maturity and reflected in the price of the bond.

With inflation running at about 1.9 per cent, total return is about 4.37 per cent annum, better than the average ASX dividend yield.

Praeco fixed rate bond

Praeco is an unlisted special purpose vehicle that was contracted under a public-private partnership arrangement to build and maintain the Headquarters Joint Operations Command for the Australian Department of Defence near Canberra.

Construction of the building is complete with the project now in the low risk operational phase which will continue until 2036, when the assets will revert back to the Commonwealth government. Income is a monthly service fee paid by the Commonwealth.

The bond is low risk investment grade, paying fixed quarterly payments with a scheduled maturity date of July 2020 and final maturity in July 2022. The yield to scheduled maturity is 3.50 per cent a year.

Dicker Data floating rate, high yield bond

Dicker Data (DDR) is ASX listed and one of the largest wholesale distributors of computer hardware and related products in Australia and New Zealand.

The group has around 400 employees and distributes to more than 5,000 resellers.DDR’s vendors include Hewlett-Packard, Cisco, Microsoft, Toshiba, Samsung, Toshiba and other major global brands.

The company issued a high yield bond in March 2015 that is due to mature in March 2020 but has a call date in March 2019, where it has the option to repay the bond but not the obligation. If the company calls the bond early, investors will be repaid $101.50 instead of the face value $100 as part compensation for the shorter term. In this instance, the yield would be 4.10 per cent, or if repaid at the later date 4.65 per cent per annum

There are limited floating rate bonds available to retail investors and this one from a growing Australian company is still considered good value despite its possible short maturity.

There are few investments that can project the expected return up front and repay capital at maturity. Corporate bonds are great diversifiers.