For income as. as clockwork

Transcription

1 For income as as clockwork The aim of the AMP Capital Corporate Bond Fund is this to provide monthly income. It targets investment-grade corporate bonds, in Australian and global markets, to minimise risk and broaden opportunities. AMP Capital has the scale and relationships to find the best-priced bonds. Could your clients fixed income portfolio benefit? Learn more at ampcapital.com.au/clockwork Investors should consider the Product Disclosure Statement (PDS) available from AMP Capital Investors Limited (ABN , AFSL ) (AMP Capital) for the AMP Capital Corporate Bond Fund (Fund) before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. AMP Capital Funds Management Limited (ABN , AFSL ) (AMPCFM) is the responsible entity of the Fund and the issuer of units in the Fund. Neither AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this document, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to their objectives, financial situation and needs. ACI0109/FPC1/PP

2 IN FOCUS W hen planners look around the investment universe, the return outlook everywhere is grim. But fixed income is a particular problem. Yields on bonds and term deposits have slumped on the back of rate cuts and stimulus. If you invest now and interest rates rise, as many expect, you could face big capital losses. Many investors are chasing yield and Challenging conditions make investing in riskier hybrids. But planners it more important than ever and their clients don t have to take big for fixed-income investors to risks to get yield and income, even in have a clear objective. this environment. Ben Power reports. There are investment options, such as floating-rate notes, which have decent yields, but also protect against interestrate rises. Planners can also look at more complex managed options, including income and absolute return funds. And despite low yields, analysts urge planners not to forget bonds primary role: a portfolio diversifier. Don t give up on what traditional bond funds bring to the table, and why you have fixed income in the first place, says Tim Murphy, co-head of fund research at Morningstar Australasia. In this complex investing environment planners need to be clear about their objectives for fixed income. Are they seeking portfolio diversification, or are they looking to generate income? Going forward, it s all about separating those goals, says Simon Warner, head of macro markets, fixed income, at AMP Capital. One of the key roles of fixed income has been diversifying a portfolio: T1 5 : 0 7 : : always 0 0 when equities fall or crash, a flight to GETTING CREATIVE TO AVOID BIG RISKS ACI _ St r i p 1 _ PP - If your clients seek a regular monthly income, visit ampcapital.com.au/clockwork ACI0109/Strip1/PP

3 IN FOCUS THREE TYPES OF BONDS Issuer DBNGP Finance Corporation Pty Ltd Call/ maturity date Coupon type Capital structure Yield to maturity Running yield Capital price Face value Capital value 11/10/2019 Fixed Senior debt 5.80% 5.94% $10,000 $10,101 Stockland Trust 25/11/2020 Fixed Senior debt 5.40% 7.06% $10,000 $11,682 Downer Group Finance Pty Ltd 29/11/2018 Fixed Senior debt 5.75% 5.75% $10,000 $9,999 Genworth Financial Mortgage 30/06/2016 Floating Lower Tier 2 Vero Insurance Ltd 07/09/2015 Floating Lower Tier 2 DBCT Finance Pty Ltd (Dalrymple Bay) 5.69% 7.16% $10,000 $10, % 3.38% $10,000 $9,715 09/06/2021 Floating Senior debt 6.13% 3.18% $10,000 $9,049 Envestra Ltd 20/08/2025 ILB Senior debt 6.17% 3.24% $12,475 $11,688 Sydney Airport Finance 20/11/2020 ILB Senior debt 6.65% 3.86% $12,847 $12,498 $85,322 $85,307 Prices accurate as at 4 September 2013 and subject to change Minimum initial investment $50,000 Black = retail and wholesale investors, red = wholesale only ILB - Capital indexed bond, these are linked to inflation. FIIG assumes CPI of 2.5% per annum (the mid point of the RBA inflation target) YTM - Yield to maturity incorporates any capital gain or loss at maturity or first call plus interest payments, using the pricing provided Running yield - estimated interest income for the bond based on the above prices Source: FIIG Securities Floating-rate notes safety usually sees government bonds There has been a lot written about the rise. But with bond yields so low, and many prospect of a bond bubble bursting. The coupons on floating-rate notes are tied to a benchmark usually the bank-bill swap investors expecting rates to increase, some question whether bonds are in a position to play their traditional diversification/ As the global economy improves, bond yields will drift higher, Warner says. That s fine as long as it s in line with a rate plus a margin. So when official rates defensive role in a portfolio. better economy and improvements in the rise, the coupon rises in line with rates and Warner, who manages AMP Capital s value of risk assets such as equities. But the bond price remains stable. Australian Wholesale Bond Fund, says that we don t really believe there is a bubble in Moran says that it s important to hold all three types of bonds inflation-linked, last year those concerns were warranted. bonds about to be burst. fixed-rate and floating in a portfolio. But you d look at adding additional floating-rate notes if you thought we were at the bottom of the [interest rate] cycle, she says. The Vero Insurance Ltd floating-rate But after recent Australian government bond yield increases, valuations mean that, once again, bonds can play their defensive role. Yields on 10-year Australian government bonds are up about 100 basis points from their lows in the middle of last But Warner says that bond investors also need to be clear about which commentary relates to local bonds and which relates to international markets. He, and others, note that in Australia, upward pressure on bond yields is very limited. note, which matures in 2015, has a running year, when yields fell below 3 per cent. Australia continues to be soft, Warner yield of 3.38 per cent; but the Genworth That is much closer to fair value, says. It s reasonable to expect our economy Financial Mortgage floating-rate note, Warner says. Therefore, the prospects to underperform against what we re used which matures in 2016, has a running yield of 7.16 per cent. going forward are much better at this to as the mining boom peters out. We also AMP Capital s Warner agrees that floating-rate notes are a great idea if you re thinking about preserving income. If you re purely looking at bonds through the lens of income, it s important to be on the front end of the curve, he says. level of yield than if we were speaking last October or November. Central banks around the world have pushed yields to historic lows, and Warner says US bonds were never good value when they were yielding 2 per cent. US don t think there is a local bond bubble. But many retail investors are focused on fixed interest for income. They have been spoilt in past years with term deposits. But with rate cuts, those days are over. I wouldn t want to be in a lot of Warner says floating-rate notes are not a Federal Reserve chairman Ben Bernanke retirees shoes at the moment, says substitute for diversification, but are a good ACI 0109_St r i p2_pp - 1 has recently talked 09-16T15: about tapering 15: of 08+10: Elizabeth 00 Moran, director of education substitute for the likes of term deposits. quantitative easing, which would likely see bond yields rise. and fixed income research at FIIG, of the low-return environment. AMP Capital has a 40-year track record of fixed income investing. ACI0109/Strip2/PP

4 IN FOCUS AS THE GLOBAL ECONOMY IMPROVES, BOND YIELDS WILL DRIFT HIGHER. THAT S FINE AS LONG AS IT S IN LINE WITH A BETTER ECONOMY AND IMPROVEMENTS IN THE VALUE OF RISK ASSETS ACI _ St r i p 3 _ PP SIMON WARNER - 1 Jason Blumberg, senior investment analyst at van Eyk, says retail clients generally want steady income with capital protection: they want to earn around 5 to 6 per cent a year without losing their money. If investors are chasing income, his advice is to get out of government bonds, because rates are so low. There is only one direction for them to go [up], and you could end up getting quite hurt, he says. In the past few years, investors have substituted bonds with term deposits, he notes, while direct bond holdings have been focused on hybrid securities. But many analysts are now warning of the growing risks of hybrids particularly with recent issues, which have more terms and conditions that make them more equity-like. FIIG s Moran says hybrids do provide the yields investors are looking for. But I m not sure investors are factoring risk into the situation, she says. FIIG prefers older hybrid issues, which are less equity-like, from companies such as National Capital Instruments (a subsidiary of National Australia Bank), Rabobank, Swiss Re and AXA SA. else do investors turn? There T 1 5 : 1 1 : :So0where 0 are a number of options, particularly Today, we re among Asia s largest fixed income managers. See more at ampcapital.com.au/clockwork ACI0109/Strip3/PP

5 IN FOCUS floating-rate notes. Moran says there is probably not the opportunity to make big money in fixedrate bonds, as there has been in recent years. (Fixed-rate bond prices rise when interest rates fall; but they help investors meet expenses, and the income is known, as is the overall rate of return if they hold the bonds until maturity.) With so much money being printed around the world, Moran says it is also worth looking at inflation-linked bonds. She says if there is a spiking of growth, inflation could rise quickly. Hold some of those as protection, she says, adding that many are paying margins of 4 per cent over CPI. It s like getting TD [term deposit] rates with an inflation hedge, she says. In this environment, why wouldn t you do that? Sydney Airport Finance inflation-linked bonds, for example, have a running yield of 3.86 per cent. Moran notes that the running yield doesn t make any inflation assumption. The rate is They re pretty good at getting you that [5 to 6 per cent], Blumberg says of income funds. They re not going to give you massive double-digit returns, but they provide you with the stability most retail clients are looking for. Morningstar s Murphy also likes the Macquarie Opportunity Income Fund, along with the Perennial Tactical Income Trust. They have very experienced management and have been running mandates for a long time, he says. Murphy says many funds have created absolute return mandates in the last few years. They [Macquarie and Perennial] have been running money that way for a long period of time; it s not a new thing for them. The current market is particularly challenging for investors, with returns low across most asset classes, including fixed income. That means investors and advisers need to be crystal clear about what they re trying to achieve; and when it comes to income, advisers will also have to be more creative than they have been in the past when term deposits delivered strong returns. But there are options, particularly floating-rate notes. Investors will also have to be mindful that chasing yield means higher risk. paid on the growing face value of the bond. If quarterly inflation is 3 per cent, the face value would rise from $100 to $103 and the 3.86 per cent is paid on the new face value of $103. But with interest rates possibly rising, a major focus has been on floating-rate notes. (See box on p38.) Planners and their MARKET EXPECTATIONS OF FUTURE INTEREST RATES clients don t have to buy floating-rate notes directly. They can get Date 3-month bank bill 10 year Commonwealth exposure through certain income funds, including absolute swap rate (BBSW) (%) government bonds (%) return funds, which are growing in popularity. Blumberg says absolute return funds are good for the right type of investor, 3M though they do employ complicated strategies. 6M 2.58 n/a They re good if you re comfortable with hedge-fund type 1Y investments, he says. 2Y Absolute return funds are capable of getting investors closer to 3Y double-digit returns, Blumberg notes, but with extra risk. He likes, for example, the GAM Absolute Return Bond Fund. 4Y It has a good track record over time. It does use quite a few 5Y options strategies and long-short bond strategies, he says. 6Y Blumberg says income funds also have a role in this low-rate 7Y environment. He likes Kapstream Absolute Return Income Fund 8Y and the Macquarie Income Opportunity Fund. 9Y They re a really good alternative to term deposits if you re looking for a bit of a premium over cash, he says. 10Y Those funds invest in high-quality credit securities and 15Y short-term corporate debt used for funding working capital Source: Bloomberg, FIIG Securities Limited requirements, ACI 0109_St which is very r i p4_pp short-term and - therefore reduces 09- risk 16T15: 13: 38+10: 00 Rates as at 4 September 2013 particularly interest-rate risk. To take bond opportunities fast ACI0109/Strip4/PP

6 AMP Capital takes an agile approach Your clients want an investment vehicle that takes opportunities at speed. AMP Capital meets this demand. Our scale lets us process massive amounts of information to find the value. Our experience lets us access all types of bonds from major capital markets around the world. But it s our management approach that makes us nimble enough to seize new possibilities. See all we can do at ampcapital.com.au/clockwork or follow us on While every care has been taken in the preparation of this advertisement, AMP Capital Investors Limited (ABN ) (AFSL ) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This advertisement has been prepared for the purpose of providing general information, without taking into account of any particular investor s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this advertisement, and seek professional advice, having regard to the investor s objectives, financial situation and needs. ACI0109/FPC2/PP