A Beginner's Bond Portfolio
One of the big attractions is that control, allowing you to diversify away from companies where you already own the shares. Not all bonds will suit all investors.
So, I’m going to suggest nine bonds but ask you to choose the five you think would suit you best — there are 126 combinations from this short list and no right or wrong answers. Included in the list of nine to consider are:
- Four fixed-rate bonds that will give you a defined income, and I think that’s important to a lot of investors at the moment
- Three floating-rate bonds, where interest income goes up and down depending on interest rates. If interest rates start to rise, these bonds will deliver higher income in the months ahead
- Two inflation-linked bonds. While inflation is low at present and not expected to rise in the near term, this could be a good time to buy these bonds as it is always important to have inflation protection and to be prepared for the unexpected
I would recommend new investors hold at least one of each kind of bond to help protect their portfolios from a range of economic conditions. If you decided to buy all nine the yield to maturity for the portfolio would be 5.07 per cent a year. Choosing the five with the lowest risk is 4.57 per cent while the highest risk and return would provide a yield to maturity of 5.69 per cent.
The lowest risk bond on the list is the Envestra inflation linked bond. Interestingly, it has a yield to maturity of 4.62 per cent a year, higher than National Wealth Management, which is also considered low risk. A large part of the reason the return is higher is because the bond has a longer term to maturity of about nine years as against an expected one year maturity for National Wealth Management.
A key assessment is the yield to maturity rate, which is the amount you can expect to earn a year if you hold the bond until it matures. National Wealth Management Holdings is a subsidiary of National Australia Bank.
It is expected to be repaid on its first call date in a year and its yield to first call is 3.58 per cent a year. It’s higher risk than NAB one-year term deposits but pays a higher return.
The highest risk bonds are the two from Australian Securities Exchange-listed childcare provider G8 Education and the Qantas bond. G8 is a smaller company, as are the bond issues, so investors are paid more to compensate for the perceived higher risk.
The G8 fixed rate bond has a yield to first call of 5.49 per cent a year and even higher ongoing income — running yield at 7.28 per cent.
This would be an attractive bond for those investors looking to generate a high, known income stream.
All bonds are available in the over-the-counter market. The fixed and floating rate bonds are available in $10,000 face value parcels, while the inflation linked bonds are around $12,500. Rates accurate as at 24 June 2015 but subject to change.
Elizabeth Moran is a director of education and fixed income at Sydney-based bond broker, FIIG Securities.
She is a specialist on the bond market and regularly presents at conferences across Australia. Elizabeth is the editor of FIIG's weekly newsletter The Wire and is the is the author of "The Australian Guide to Fixed Income".