Corporate bonds – the right defensive play?
Corporate bonds play an important defensive role in an investment portfolio.
Corporate bonds can provide capital stability and a steady stream of returns upon which the rest of a portfolio can be built. David Carruthers, Head of Credit and Core at AMP Capital, explores why investors should consider corporate bonds in the current economic environment.
1. Higher income than term deposits and government bonds
Corporate bonds can provide income in excess of government bonds and term deposits. A diversified corporate bond fund is currently yielding more than 3.5%*. Compare this to the 5 year Australian government bond which is yielding 2.08% and the highest paying five year term deposit in the market which provides interest at just over 3%**.
2. A strong buffer against share market volatility
Corporate bonds offer relatively stable cash flows and may be considered a lower risk way of gaining exposure to companies rather than investing in equities. Since corporate bonds and Australian equities often move in opposite directions to one another, an allocation to corporate bonds can add to the defensive properties of a diversified portfolio.
3. Minimise the risk of capital loss
Active bond managers will commonly adjust a bond portfolio’s duration, which measures the sensitivity of price movements to a change in interest rates. By managing the portfolio’s duration, an investment manager aims to limit the risk of capital loss if bond prices were to fall sharply.
4. Access the benefits of diversification
In an actively managed, diversified corporate bond fund, investors are able to spread their portfolio risk by being exposed to a range of issuers, industries or geographies. Typically, when investors have exposure to a large number of securities (around 100), the likelihood that a default or systemic event will have a major impact on a large part of their portfolio is minimised.
AMP Capital Corporate Bond Fund as at July 2015. Past performance is not indicative of future returns.
** Five year term deposit with an investment of $10,000 (Westpac, St George, Bank of South Australia and Bank of Melbourne).
About the author
David Carruthers leads the Global Fixed Income team’s credit and core bond fund capabilities and is responsible for macro credit strategy. Mr Carruthers was previously Senior Portfolio Manager within Credit Markets from 2003 and led the Credit Portfolio Management stream as well as macro credit strategy.