By Gaby Rosenberg, Co-Founder, Blossom
In the dynamic world of investment, the allure of fixed income assets has grown significantly as investors seek stable returns and diversified portfolios.
In this article, we explore how to get started from brokers and ETFs to expert-managed funds like Blossom. We’ll discuss bond risks and the value of professional management in today’s market.
There are a range of different ways to start your fixed income investing journey:
- Through brokers: brokers can help access the market where bonds are not publicly traded.
- Exchange traded funds (ETFs): investors can access the bond market via an ETF, which is an investment vehicle that tracks a specific type of bond. ETFs offer diversification and access to a group of securities, rather than being limited to one bond investment.
- Listed investment trusts (LITs): these are investments listed on an exchange such as the ASX and incorporated as a trust. Listed investment trusts will invest in bonds for you. They are owned by shareholders, as opposed to ETFs which are externally managed. LITs pay out any surplus income to investors as trust distributions, according to the underlying investments.
- Super: super is another way of investing in fixed income. If you have a balanced or a defensive super portfolio, chances are you have a large proportion of fixed income investments, for example cash, bonds and other fixed income assets.
Also read: Seeking Yield: The Resurgence of Bonds In Personal Investing
5. Managed funds, like Blossom: Managed funds give investors an easy way to gain exposure to bonds where the investing is done for them by professionals. In Blossom’s case we target 5.25% p.a. with earnings posted and compounded daily. Be sure to look for managed funds that offer a properly diversified exposure. The Blossom Fund is diversified across more than 500 exposures and has had 100% positive months since inception.
Considering the risks of bonds
Like all investments, there are some risks when investing in bonds that are prudent to be aware of:
- Credit Risk: there is a risk of not receiving your money back on an investment in a corporate bond if the company becomes insolvent. Research houses provide risk ratings, making it easier to gauge risk levels before investing. Higher bond ratings (A, AA, AAA, BBB) indicate lower risk and are considered “investment grade,” historically showing low default rates in Australia.
- Liquidity Risk: while bonds can be sold any time there is a buyer, many investors hold them until maturity, potentially resulting in costs if sold earlier. Selling before maturity can lead to uncertain returns, as bond prices fluctuate based on market factors, especially interest rates.
- Interest Rate Risk: fluctuating interest rates do influence bond prices. When rates rise, fixed rate bond prices fall, making existing fixed rate bonds less attractive compared to newly issued bonds with higher yields. Conversely, falling interest rates can increase bond prices as they become more appealing. Floating rate bonds are more capital stable as interest rates are adjusted quarterly.
- Inflation Risk: rising inflation leads to higher interest rates. As a result, existing bonds with lower yields become less desirable to investors compared to new bonds with higher yields, potentially impacting bond prices.
- Duration Risk: this refers to the sensitivity of bond prices to changes in interest rates. Bonds with longer durations are more sensitive to interest rate changes, experiencing larger price fluctuations compared to those with shorter durations.
Understanding and managing these risks are essential for investors to make informed decisions.
PODCAST: Blossom: The Millennial Savings App with Gaby Rosenberg – Co-Founder of Blossom
The value of expert help
Interest rates have risen quickly, and this has reduced confidence in equity and property markets. The bond market has also experienced considerable disruption, but the outlook is positive and represents a positive choice for investors’ money right now.
In fact, bond market disruption benefits those holding high-quality assets like those in the Blossom Fund. It provides more accurate pricing of assets which means there is opportunity to capitalise on higher overall yields and bolster medium-term performance.
However, the bond market is not homogenous, and investors need expert management to navigate current market conditions. Few retail investors have the knowledge, experience, or skill to invest in bonds individually. There’s value in having an allocation to the bond sector right now, but retail investors should be careful, seek advice or do research looking at different options before buying individual bonds on their own.
The Blossom Fund is diversified across more than 500 exposures and has had 100% positive months of returns since inception despite 10 consecutive interest rate hikes. It is actively managed by Fortlake Asset Management, confident in its strategy and well-prepared to navigate uncertain times.
Disclaimer: Nothing in this article should be construed as being personal financial advice. It is general nature only and has not taken into account your particular circumstances, objectives, financial situation or needs. An investment in the Fund is subject to investment risk. The target rate of annual return from investments retained in the Fund is not guaranteed and no assurance is given that the target rate will be achieved for any time the investment is held in the Fund. Past performance of the Fund is not a reliable indicator of future performance. No performance is forecast.
