The default allocation for super funds in Australia is the “balanced portfolio” which typically has 60 per cent or more allocated to shares. However, this is not necessarily the norm for pension funds in other countries. According to the Organisation for Economic Co-operation and Development (OECD), Australian investors have the highest portfolio allocation to shares and the lowest to bonds in the world. The OECD survey of 13 countries found the average allocation of Australian super fund members to shares was 59 per cent. The average allocation to bonds was 14 per cent. Pension funds in Sweden, Norway, Denmark and Spain all have more than 50 per cent of their holdings in bonds. Denmark, Spain, Italy and Germany all have less than 20 per cent of their holdings in shares.
After I read about the OECD survey, I also checked my account with Employee Provident Fund (EPF), Malaysia’s national pension fund and found that they too only have a 30% allocation to shares and 70% allocation to fixed interest securities. I have had an account with the EPF for over twenty years and I have never had a year of negative returns. Although the annual returns are not that high (average of 5 per cent), it is very comforting to see your nest egg growing steadily every year.
According to information released by the ASX, the average DIY super fund only has a 2 per cent allocation to interest bearing securities! I have to confess that our SMSF also has had very little exposure to fixed interest securities. The only type of fixed interest investment that we have bought in Australia is term deposits. We did not really know much about other types of fixed interest investments that are available to retail investors in Australia. If you would like to learn more about bonds and other fixed interest securities, FIIG Securities has published a free booklet called An Australian Guide to Fixed Income and it is quite a useful resource to learn more about the different fixed income products available in Australia (thanks Peter for pointing me to this resource).
Fixed income returns in Australia are currently pretty good. “Risk free” Australian government 10 year bond yields are currently at around 5% so most other types of bonds are paying coupon (interest in bond lingo) that is higher than that. I did a little more research and found that when you look at five or ten year returns, some fixed income funds have outperformed growth and balanced funds. This is contrary to the conventional wisdom that has been preached by financial advisers that stocks always outperform fixed interest in the long term. We recently completed our annual review of the investment strategy for our SMSF and decided that we would like to increase our exposure to Australian bonds.
The next question naturally is how do you buy bonds in Australia? Bonds are not traded on an exchange like stocks. Most bonds are traded OTC (over the counter) in Australia which means you need to go through a fixed income broker like FIIG Securities. Bonds are traded in large parcels (the smallest parcel is $50,000) so it is hard for a small retail investor to build a diversified portfolio of bonds. Even if you have $50,000 to invest in bonds, you probably do not want to invest that in one type of bond as that would be equivalent to buying shares in one company when you are building a stock portfolio. Just as you would buy shares of different companies across a number of sectors in your stock portfolio, you would want to buy bonds of different durations from different issuers. If you have about $1 million that you would like to allocate to bonds, you could build your own bond portfolio and a sample portfolio can be found in this recent article in Eureka report.
If you are like us and have a lot less than $1 million to invest in bonds, then you may have to get your exposure through managed funds like the ones mentioned in this article Bonds deliver dazzling rewards.
You can buy these through the normal channels e.g. financial advisers and I am planning to buy ours through no advice brokers like Yourshare who will rebate you with a portion of the trailing commissions paid by the fund to brokers (check out my earlier post on Getting your fair share of commission rebates if you want to know more about how this works). Another option for getting exposure to fixed income would be through a high performing corporate or industry super fund. Most of these funds allow you to specify your own investment allocation. For us, as Kingsley is a member of Telstrasuper, we plan to channel new contributions to the Fixed Interest investment option as another way to increase our allocation to fixed income.