Investing In Fixed Interest

As the effect of the global financial crisis continues to be felt throughout economies across the world, many investors have turned to fixed interest investments as a means of securing a return on their investment nest egg.

Unfortunately, as the Reserve Bank continues to ease monetary policy to stimulate the local economy interest rates on terms deposit continue to fall. However, all is not lost.

There are other fixed interest instruments available to investors that have the capacity to generate a consistent return and with a number of fixed interest funds generating returns in excess of 10% p.a. they present an attractive alternative to term deposits.

The Altus Financial Investment Committee currently has three fund managers engaged to managed fixed interest strategies on behalf of our investors. This exposure is mostly attained through the buying and selling of bonds.

What are bonds and how do they generate returns?

Bonds are primarily income-producing securities, but in fact, can offer very attractive capital appreciation and have over the past 5 years as the general level of interest rates has fallen in response to slowing global economies. As fixed-income securities they feature contractually obligated and predetermined coupon payments or income payments. On a set schedule, be that quarterly, twice a year or annually, income is paid to the bond holder. In contrast, shares also pay income, but these dividends tend to oscillate, and unlike bond coupons which are contractual, dividends of equities, and many hybrid securities, are issued at the discretion of company management. This means that in a downturn, the income can be reduced or even eliminated altogether.

When you combine the two components of a bond’s return – the coupon yield and the capital appreciation – you get the bond’s total investment return. As cash rates have been reduced to stimulate the Australian economy, domestic bonds have appreciated in value. This phenomenon can also be seen in bond markets around the world.

Gaining access to bonds

For investors who are relying on a generous, consistent income stream to allow for improved lifestyle planning, mitigating risk is essential. The global bond market is a colossal $100 trillion ‘supermarket’, with many different aisles and a constant inventory of defence and opportunity. For an active manager like PIMCO (one of the fixed interest managers we currently have engaged), this means having the expertise to identify and access high quality securities whilst steering clear of securities that expose investors to unnecessary levels of risk. For example the PIMCO Global Bond Fund has returned 14.16% for the 12 months to 30 September 2012 and has returned in excess of 10% p.a. over the last 5 years.

Altus clients have generated significant returns from the use of fixed interest managers at a time when interest rates are falling and the returns from other asset classes have been volatile.