Our Bonds investment option performance has been best-in-class for the last year. Learn why we’ve done so well and how we expect the option to do in future here!
Bonds have long been a staple of investing because they offer a fixed income. They’re a stable and reliable option for people who want their money to generate a steady income with less volatility than things like shares or property.
Because they’re not flashy, bonds are an afterthought for many people. The thing is, they’re a standard part of the investment portfolio for many superannuation funds because they allow people who are approaching retirement to protect their accumulated wealth while keeping it growing.
If you’re living in retirement, having your account-based pension invested in bonds can help that money go a little further as income earned from age 60 is tax free.
What is a bond?
Simply, a bond represents a loan to a government or a company. When you hold a bond, for example a 10-year government bond, you receive interest over time as the loaned amount is paid back. Because governments are generally good about paying their obligations, bond returns aren’t as lucrative as, say, a personal loan. The trade-off is that they aren’t as risky either.
Rates are lower today than they have ever been. If you hold a bond for its full term, you can expect a low return. While the income received is fixed, the value of that bond can fluctuate through time and this feeds into the return we report. As rates go up, bond prices go down. Conversely, if rates go down, bond prices go up.
Rates have recently dropped and this has been a tailwind leading to higher returns than we would normally expect.
Why our performance is excellent
Our Bond option is true to label. It still has a relatively high exposure to the effects of changes in rates and more exposure to governments and less exposure to corporations. At the same time, we have a separate fixed income investment option, Credit Income, which is more exposed to corporate credit but much less sensitive to changes in rates.
Because pure bonds have been outperforming credit during the last year, our pure Bonds option has outperformed a mixture of bonds and credit.
With our investment option, you know exactly what you’re getting when you invest in Bonds. That isn’t to say there is no value in having investments in credit; it’s why we offer a Credit Income investment option as well, giving members the flexibility to select their investment mix. You can allocate more or less among your investments as you see fit.
Will the pure Bonds investment option continue to outperform a bonds/credit hybrid in the future? Nobody can say for certain; however, the recent bond performance comes on the back of yields dropping. Our investments team do not expect that to continue forever. The RBA is expected to reduce the cash rate in the short term, which may have a positive impact on bond returns in the short term, however this cannot continue for much longer with the cash rate currently at 1.5%.
Setting your investments up for future success
The best investment mix depends on many factors, including how the markets are performing and how much risk you’re willing to accept.
There’s no perfect solution for everyone. The best thing to do would be to speak with a financial advise to create an investment mix that’s appropriate for your needs. This is true no matter if you’re in the years leading up to retirement or already living off of your superannuation balance using an account-based or transition to retirement pension.
Have questions? Give us a call to talk about your options and find a solution that’s right for your needs. Call us on 1300 658 776 or find other ways to get in touch here.