Australian super funds look at corporate bonds
Despite of a drop in Australian super funds’ ‘underinvestment’ in bonds, super funds still invest far more in deposits and less in bonds than their counterparts abroad, according to Spectrum Asset Management.
However, the firm said, the reasons behind the Australian preference for deposits had begun to evaporate and now it would make more sense for a more balanced allocation between the two types of investments.
According to Spectrum’s study, Australians traditionally tended to invest more in equities, in particular local equities, which was favourable from a tax perspective. At the same time, they also preferred deposits over bonds, which were often used as part of their overall fixed income or bond allocation.
Spectrum’s principal, Damien Wood, said that this could be explained by the fact that post the Global Financial Crisis (GFC) term deposit interest rates were comparable to corporate bond yields and additionally came with the safety of a government guarantee.
However, he stressed, that now the landscape for deposits had much changed.
“Post GFC, the banks were willing to pay up for deposits to shore up the perceived stability of their funding bases,” he said.
“Now the banks have exceeded regulatory liquidity benchmarks, the pressure for them to raise more deposits has eased.”
Also, under the new regulations, the banks would treat term depositors less favourably.
“Previously, one could make a term deposit, enjoy the benefits of higher rates than savings deposits and break the deposit before maturity without penalty,” Wood said.
“Now, the depositor needs to give the bank 31 days’ notice to break a deposit. And then the bank is discouraged from paying the interest earned until the break date.”
Wood also stressed that although savings accounts could give access to money at call, the offered interest rates on them were nearing zero per cent and if investors wanted to be able to access funds at will and earn a reasonable return, a corporate bond fund or corporate bonds may be the answer.
“Like savings accounts or cash management trusts, corporate bond funds can provide readily available access to funds,” Wood said.
“To get deposit returns near typical corporate bond yields, an investor needs to give up liquidity and tie up the funds for a longer period.
AUTHOR
Oksana Patron
Recommended for you
AMP is to launch a digital advice service to provide retirement advice to members of its AMP Super Fund, in partnership with Bravura Solutions.
Unveiling its performance for the calendar year 2024, AMP has noted a “careful” investment in bitcoin futures proved beneficial for its superannuation members.
SuperRatings has shared the median estimated return for balanced superannuation funds for the calendar year 2024, finding the year achieved “strong and consistent positive” returns.
The second tranche of DBFO reforms has received strong support from superannuation funds and insurers, with a new class of advisers aimed to support Australians with their retirement planning.
