An overviewPrint this page

Investors can receive regular monthly income from the AMP Capital Corporate Bond Fund

Income is generated via interest payments companies pay on their borrowings. These interest payments to bond investors are higher priority than dividends to shareholders. The AMP Capital Corporate Bond Fund, which previously was not widely available to retail investors, has produced regular income since its inception in November 1997.

Our track record of being a cornerstone investor in newly issued investment grade corporate bonds can benefit investors

The corporate bond market is an ‘over the counter’ market where brokers and pricing agencies quote buy and sell spreads on a case by case basis between specific parties. AMP Capital’s scale and size in the Australian market means we are considered for participation in many new bond issues. Our often first and sometimes exclusive access to deal flow enables us to directly negotiate favourable prices, terms and conditions for our investors.

Active management can add value and mitigates risk

The AMP Capital Fixed Income team undertakes their own shadow-rating assessment of credit securities with limited reliance on public ratings. This in depth bottom-up research in conjunction with the active management of credit risk helps to add value and reduce the risk of default by avoiding poor quality companies.

We believe the current environment presents a unique opportunity for investing in corporate bonds

With interest rates stabilising and an increasing supply in the market, strong returns from government bonds are unlikely over the next three to five years. In addition the current move to deleveraging in the economy is favourable for corporate bonds. As companies begin lowering debt on their balance sheet, their investment quality subsequently improves.

Why corporate bondsPrint this page

Regular income

Corporate bonds can provide investors with regular income. This income is generated via the interest payments companies pay on their borrowings from investors. Companies that issue bonds are legally bound to pay this income. If a company does suffer financial difficulties, interest rate payments to fixed income investors are a higher priority and more guaranteed than payments, such as dividends, to shareholders. As a result, corporate bond investors usually have a higher security of income than ordinary shareholders.

Higher returns than government bonds

Over a full investment cycle, corporate bonds offer higher returns than government bonds due to their perceived higher risk. The chart below shows where corporate bonds are positioned on the risk and return chart in relation to government bonds, other fixed interest investments and more growth-oriented investments such as property and shares. By lending to high quality companies, investors can receive a better return relative to government bonds with only a slight increase in credit risk, providing good risk-adjusted returns.

Hear from our experts

Jeff Brunton, Head of Credit Markets, AMP Capital Investors discusses the investment case for corporate bonds.

Why investPrint this page

While we believe corporate bonds are a core investment through a full investment cycle, our view is that the current investment environment potentially presents an excellent investment opportunity.

A weak outlook for government bonds

Currently the economic cycle is conducive to investing in corporate bonds, particularly relative to government bonds. With official interest rates falling over 2008, government bonds provided abnormally high returns. However as interest rates stabilise and the current government stimulus means a large continued supply of government bonds on the market, strong returns in this sector is unlikely over the next three to five years. In fact valuations in government bonds are likely to fall. As Chief Economist and Head of Investment Global Strategy, Dr Shane Oliver confirms, “Bond yields have fallen in 2008, reflecting heightened credit and liquidity risk. However at current yields, government bonds are overvalued on underlying long term fundamentals such as growth and inflation.”

Companies moving to reduce debt

The global financial crisis has also sparked a move to deleveraging, the process in which debt is paid off. This process is closely linked to the credit cycle, shown below, which we believe is a good indicator of what’s happening in the overall economy. In terms of where we are in the cycle, as the arrows show, the economy is experiencing a downturn, credit spreads are high and the probability of default is rising with companies less able to meet debt payments.

Lower debt levels means less risk

As the economy slows, consumers tend to save more and reduce their expenditure and investment. Companies too start focusing on their financial wellbeing and begin reducing debt levels on their balance sheets. This move to deleveraging offers a good environment for investing in corporate bonds. As companies lower their debt, credit spreads tend to contract, a process which we believe will take place over the next three to five years.

As credit spreads narrow, capital values rise, company ratings improve and subsequently more cash is available for interest repayments. Investment grade bonds are particularly attractive as there is less likelihood of default relative to non-investment grade bonds. Under the current market conditions especially, investors are potentially receiving a strong premium for taking on modest amounts of risk.

Newly-issued corporate bonds are better quality

Following the last two years of adverse market conditions, our view is that 2009 is a good vintage for investment grade bond issuance. Bond issuers are focussing on being more responsive to the needs of their lenders by way of improved covenants and underwriting standards. The result is that this year, higher quality corporate bonds are being issued at good prices with stable income streams.

The advantage of active management

While the outlook for investment grade corporate bonds appears positive, as the credit cycle chart shows, it is also important to avoid the risk of default, particularly in lower rated bonds. We believe the risk of default can be mitigated via active rather than passive management. Index or passive investing can also present additional risk in the way of high concentration risk, especially within the UBS Composite Bond Index (All Maturities). This is because the highest proportion of the index is exposed to the largest borrower (such as government and semi-government bonds) which may not always be an appropriate investment choice.

Active management also has the potential to add value through sector and stock selection. And, as market conditions shift, it allows tactical allocation within sectors, with the potential for value add between cyclical versus non-cyclical industries or investment-grade versus non-investment grade bonds.

Hear from our experts

Mark Beardow, Head of Fixed Income, AMP Capital Investors, discusses credit markets in a deleveraging world.

The AMP Capital Corporate Bond FundPrint this page

The AMP Capital Corporate Bond Fund² offers:

• The aim of providing investors with regular monthly distributions and total returns above government bonds.
• Access to an actively managed portfolio of credit securities, with a focus on investment grade corporate bonds in the Australian market, and some exposure to global bond markets.
• Diversification across industries and securities.
• Access to AMP Capital’s major presence in the Australian fixed income market for over 30 years, and a team with a depth of experience managing corporate bonds, plus.
• The benefit of AMP Capital’s extensive fixed income, economic strategy and equity capabilities.

The offer at a glance

The teamPrint this page

AMP Capital has a major presence in the Australian fixed income market, and with over 30 years of fixed income experience, we bring a number of advantages to managing corporate bonds. These include:

• A depth of experience within the corporate bond sector. AMP Capital was one of the early investors in the Australian corporate bond market and has an almost 12 year history of managing the AMP Capital Corporate Bond Fund.
• A track record of being a cornerstone investor in newly issued investment grade corporate bonds. Due to our size and presence in the Australian market, AMP Capital is one of the first managers to be considered for participation in many new bond issues.
• The backing of a well-resourced fixed income team with a diversity of experience in banking, funds management, ratings agencies and research across the major regions of Asia Pacific, Europe, and North America.
• A specialist approach across industries and sectors in conjunction with the active management of credit risk. Through active management, the AMP Capital Corporate Bond Fund has withstood the global financial crisis plus other major movements in the business cycle over the last 12 years, consistently delivering income over this period.
• A dedicated Portfolio Construction and Risk Management team that helps our investment team align their research views and security positions given risk budgets and investment mandates. The team is supported by leading edge risk management systems.
• The support by the broader resources of AMP Capital’s extensive economic strategy and equity capabilities.

How bonds workPrint this page

What is a bond

One of the most common types of fixed income securities is a bond. A bond is a form of debt. Governments or companies (known as the issuers) choose to borrow from investors by issuing bonds. A corporate bond is issued by a company rather than a government and is characterised by a higher return profile due to perceived higher risk. In its most simple form a bond pays the investor (or lender) interest rate payments and subsequently, at the bond’s maturity, the principal. Key characteristics of a bond include:

• A regular interest payment
• A fixed maturity date
• A market value over the life of the bond
• A face or par value at maturity

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Trading bonds

Like shares, bonds are commonly bought and sold on a traded market rather than held to maturity. This is because the market value of a bond can change daily whether it is traded or not and investors normally want to maximise the value of their bonds at any given point in time. This means a fixed income portfolio can experience capital gains and losses and vary in terms of income and total return.

The market value of a bond is influenced by the current interest rate, demand and supply factors and the risk of default by the issuer. The yield is a figure that shows the current income received from a bond. When a bond is bought at face value, its interest payment is equal to its current yield. When the price of the bond changes, so does its yield. These two factors have an inverse relationship. When market yields or interest rates rise, the price of existing bonds fall. This is because investors can lock in a higher interest payment by buying newly issued bonds at their face value. Consequently they will not pay the face value for the existing bond that is now offering lower yields or income. The reverse occurs when market yields fall.

Some examples

Credit spreads

When trading bonds, credit spreads are an important factor in determining the relative value between the different bonds available. Credit spreads are the difference in income between a non-government (corporate) bond and an equivalent government bond in terms of maturity and geographic region. The extra income on the corporate bond is because an investor needs additional compensation for taking on more risk. Usually that extra risk relates to the risk of default for that corporation plus its ability to be traded and the volatility of its return relative to government bonds. As mentioned above, generally there is an inverse relationship between credit spreads and price so credit spreads narrow means higher prices and vice-versa.

Credit ratings

Many fixed income products are rated by independent ratings companies such as Standard & Poor’s. The rating is a measure of a company’s assessed ability to repay the principal on its debt as well as interest.

The highest credit rating for a security is AAA indicating a very low probability that the company issuing the debt will default on its interest payments to the investor. Correspondingly income levels are lower than higher risk securities. As you invest further down the credit scale towards BBB or BB rated securities, credit risk increases but investors are normally rewarded by higher returns.

Standard & Poor's credit ratings and their definitions

Contact usPrint this page

If you require further information, download a copy of the AMP Capital Corporate Bond Fund Product Disclosure Statement, contact your AMP Capital Business Development Manager or call our Client Services team on 1300 139 267.