Gaby Rosenberg, co-founder of Blossom App, said investing in fixed-income products, including bonds, can generate resilient income over a full-market cycle.
“While this type of exposure has long been a principle of modern investing for institutions, the emergence of new financial products has increased accessibility for self-directed investors,” Rosenberg said.
“SMSFs now have a collective $1 trillion in capital but tend to invest in assets like Australian shares and direct property in their portfolios. This may leave them without a meaningful allocation to fixed income that can provide regular income, downside protection and portfolio diversification.”
Rosenberg said ATO figures show SMSFs held just $13.2 billion in direct debt securities at 30 June compared with the $170.7 billion held in cash and term deposits, and $296 billion held in listed Australian shares at the same date.
“There are several reasons why SMSFs do not choose to hold more fixed-income investments,” Rosenberg said.
“Firstly, traditional barriers to entry prevent smaller investors from building a large enough allocation to this type of investment to properly reap the benefits of the asset class. Many retail platforms still do not offer the breadth of fixed-income products to retail investors that institutions enjoy.”
Furthermore, she said the perceived complexity of credit spreads, duration and yield curves can be off putting to advisers and trustees who are better versed in the mechanics of the share and property markets.
“Technology can help overcome some of these issues. For example, apps with a user-friendly interface allow people to readily engage with their investments and track their progress – not unlike the stockbroking apps with which many are already familiar,” she said.
Rosenberg said previous market cycles show that fixed income has a place in a well-diversified portfolio for all kinds of investors.
“While cash offers short-term liquidity, it can lack the flexibility and long-term earning potential of other defensive asset classes. Equities, on the other hand, are often more focused on growth, and with that can come increased volatility,” she said.
She continued that the defensive qualities of bonds can offer a middle ground that provides a stable source of returns over time.
“The typical risks of the asset class – rising interest rates, inflation and potential for issuer default – can be mitigated with an actively managed fund that has an established track record,” she said.
“There are several factors that should be considered including whether assets are spread across a broad enough range of securities to ensure the necessary diversification for a bond portfolio. A fund’s target return and how it aims to achieve that goal with a carefully considered investment strategy are also important questions to ask.”
