ASX Corporate Bond (XTBs)

One of the weakness of the Australian capital market is the lack of fixed income options for investors. Recently, bonds have become an option for individual investors on the ASX. There are ASX ETFs that invests exclusively in bonds however these are really government funds and given the cost of managing a bond portfolio. We felt these were always on the lower end of cost effective method of fixed income allocation.

With the lack of direct retail participation in to corporate bond market, investors always preferred dividends as primary source of income. These dividends can be sourced from individual stocks or ETFs which have a dedicated dividend strategy like investing in only high yield dividend stocks. The risk here is that investors are taking on equity risk rather than credit risk. This equity risk only surface when the investor least expected like the GFC where a number of perceived safe blue chips were toasted.

Interest development in the corporate bond space by the introduction option of direct corporate bond investment by Australian Corporate Bond Company (ACBC). Corporate bonds listed on the ASX are under XTB units trust structure where the trust own the bond directly and investors can purchase units in the trust on the ASX.

This could present opportunity for companies to further raise debt capital as current corporate bond options are secondary trading of existing issues.

Aside the attractiveness of holding specific investment grade bonds in the portfolio is the interesting fee structure. The cost is the initial 0.40% of face value per annum. Fees can eating up a large portion of returns in fixed income, especially under this lower interest rate environment.

Long term super portfolio should have a dedicated fixed income allocation.

This looks to be a good option of allocating funds to bonds when rates are higher. We are conscious of interest rate risk that existing for current bond investors as when rates rise, bonds lose their PV value. Hence any investment at this stage of the cycle would focus on short duration and strong credit.

Alternatively, it provides an avenue where investors can take credit exposure rather than equity risk. Investors of bonds sits higher on the company capital structure which gives greater level of income safety relative to the risk taken.

List of bonds that can be purchased through XTBs