Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 164

Bond indexes don't reflect market diversity

Superannuation funds generally benchmark their domestic fixed income asset allocation against a market capitalisation weighted investment grade bond index such as the S&P/ASX Australian Fixed Interest Index or the Bloomberg Composite Ausbond Index. Bonds are included in these indices if they meet certain criteria (such as Australian dollar denominated, fixed rate, minimum issue size, investment grade rating) and are weighted in proportion to their market value.

Index is heavily concentrated and unrepresentative

Diving into the S&P fixed interest index, the top 10 issuers are either Commonwealth or state governments or European development banks. The largest non-government issuer is KfW (Kreditanstalt für Wiederaufbau), a German development bank.

The top 10 issuers comprise 83% of the index. The total index has a modified duration of 5.2 years and a yield to maturity of 2.14% (at time of writing). Investors might be surprised that no Australian company (for example, any of the big four banks) makes the top 10, while Australian governments occupy the top five positions.



By comparison, the top 10 issuers in the S&P/ASX 200 equity index account for only 48% of the total market value, and even this is concentrated by global equity index standards.


 There are approximately $650 billion worth of government bonds and $500 billion of non-government bonds on issue in Australia. About a third of the Australian non-government bond universe is comprised of bonds issued by non-residents, rising dramatically from last to the largest share in the last 15 years, pausing slightly during the GFC (but nowhere near as much as asset-backed securities).

Australian Non government Bond Index

The next biggest category is financials, which is dominated by the bonds of the big four banks.

Only about $50 billion are comprised of domestic non-financial corporates. That is, only about 10% of non-government bonds are what you would typically consider Australian corporate credit.

This is tiny when compared with the loan market. According to APRA data, Australian banks have loans to Australian non-financial corporates of more than $650 billion.

Traditional composite bond funds are meant to provide investors with a balanced exposure across borrower types. Investors should understand the components of any fixed interest index and judge how representative of the desired underlying investment universe the index really is.


Alexander Austin is Chief Executive Officer of Infradebt, a specialist infrastructure debt fund manager. This article provides general information and does not constitute personal advice.


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.