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Jonathan Baird, Investment Specialist, Western Asset
Compared to global peers, Australians tend to have a very low allocation to fixed income (bonds) in their investment portfolios. Yet bonds can be a reliable and stable income investment, providing capital stability alongside meaningful diversification from growth assets such as equities. The purpose of this article is to provide a deeper understanding of the fixed income asset class and the benefits of holding fixed income investments in a broadly diversified investment strategy.
Bonds vs cash
Investors have typically underinvested in fixed income, preferring to allocate funds to cash and term deposits (TD) instead. There is undoubtedly a structural element to this allocation based on investor biases and market structure as historically Australians have enjoyed high TD rates. However, investors have maintained low bond allocations, despite watching Australian fixed income outperform cash over the past decade.
The key concern now facing investors is the difficulty in generating income from their investments in a low yield world. Like Japan, the US and Europe, Australian investors find themselves with low deposit rates and shrinking income opportunities. At Western Asset, we expect returns on cash and TD to be low for the foreseeable future and it is this type of environment that tends to push investors into a ‘stretch’ for yield. We’re witnessing investors chasing yield in equities, hybrids and illiquid instruments that may not offer the same protection as high quality fixed income securities.