Australia: Bonds Deliver Yet Again

As we close the books on another Australian financial year, we make a striking observation: Over the last eight financial years, bond returns have exceeded equity returns on average by over 250 basis points per annum. Over this time, bonds also achieved this performance at almost one-fifth of the volatility of equities and have continued to demonstrate strong diversification benefits¹.

Yet, Australian investors continue to have one of the lowest allocations to bonds in the world. According to the Willis Towers Watson Global Pension Assets Survey 2016, the average Australian pension portfolio allocated only 14% to bonds, well below other developed market counterparts like the U.S. (23%), the U.K. (37%), Canada (31%) and Japan (57%). 

Since the global financial crisis, the number of Australians aged 65 and over has increased by more than 750,000, a rise of 27% in just 7 years.² With this dramatic shift in demographics comes an important need for retirement income; given that the investment horizon is shorter, retirement income sources should generally obtain exposure to assets with lower levels of volatility. 

Take the PIMCO funds as a prime example of how core bonds can be used in income provision. PIMCO’s Australian-domiciled bond funds were able to distribute almost half a billion dollars of income to clients over the last financial year. By way of comparison, an ASX-listed company that paid half a billion dollars of dividends last financial year would rank within the top 25 dividend-paying stocks on the ASX. Clearly, bonds and shares have different characteristics and shares tend to exhibit higher capital volatility and potential capital return than bonds over the long term, however, the above demonstrates that bonds should not be ignored in considering income solutions. 

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Australia’s Economy Pivoting 

History is one thing, but what about the future?

The growth engine of the Australian economy is pivoting from mining to housing, which can be characterised as moving from a sector where Australia had a legitimate comparative advantage to a sector where we have a comparative disadvantage. The mining sector benefitted from ample sources of high-quality ore and close proximity to China, whereas the housing sector will likely eventually be weighed down by a highly levered consumer, expensive house prices and no limit on supply response.

This “unbalanced rebalancing,” combined with investors’ increasing focus on stable retirement income, bodes well for a healthy dose of bonds in Australian investors’ portfolios in the years to come.

1Source: Bloomberg, data period 30 June 2008 to 30 June 2016. Indices used: ASX200 Accumulation Index, Bloomberg AusBond Composite Bond 0+Index.

2Source: ABS, data period 30 June 2008 to 30 June 2015 (latest available demographics data).

This document has been prepared by PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This presentation is not a recommendation to hold, purchase or sell a particular financial product and may not include all the information an investor needs to make an investment decision. Past performance is not a reliable indicator of future results. This communication is intended to provide general information only and has not taken into account the objectives, financial situation or needs of investors. Before making an investment decision investors should obtain professional advice and consider whether the information is appropriate having regard to their objectives, financial situation and needs. Equity Trustees Limited (ABN 46 004 031 298, AFSL 240975) is the Responsible Entity of the PIMCO funds referred herein. PIMCO Australia is the investment manager and distributor of the Funds. Before making an investment decision, investors should consider whether the information herein is appropriate in light of their particular investment needs, objectives and financial circumstances and any relevant Product Disclosure Statement.  A current PDS can be obtained from pimco.com.au   

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.  

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