There's no doubt we are living in uncertain times. And it's not just the impact of Trump's tariffs and the disintegration of world trade agreements on markets and economies. We are also witnessing ongoing military conflict, the dismantling of NATO, and an acceleration of AI adoption that we are yet to understand the full consequences of. Any one of these events would have a massive impact on global markets and economies, but to be experiencing them all at once is disconcerting for even the most rational investor.
As equity markets fall, there is often a rush to sell and to move to perceived safer investments such as bonds, cash and gold. But a diversified portfolio should always have a varied asset allocation strategy that allows for investments in fixed interest and different kinds of credit arrangements.
Although there are plenty of fixed income managed funds available to retail investors - across all kinds of credit, including the private credit subsector - we are seeing particular opportunity in direct issuances of institutional-grade corporate loans and bonds.
We recognise that this is not possible for many retail investors due to the size of minimum investment. But when it is, it is arguably one of the better options for credit investors – including as an alternative to Tier 1 bank capital that is due to be phased out by the regulator by 2032.
The benefits of direct investments
There are several benefits to holding corporate credit issuances directly instead of through a managed fund or an exchange traded fund that holds many securities. The most obvious one is that, as the ultimate end investor, you get to control when you buy and sell the asset.
This is especially important in times of market turbulence. Market prices may fluctuate along the way, but if you hold an institutional-grade corporate bond or loan to maturity then you will nearly always get your money back plus the coupon payments you receive.
If you are in a managed fund, you are at the mercy of the fund manager and what they decide to do with the investment. And if many investors choose to sell the fund, those further back in line can get stuck waiting for a liquidity window to sell - possibly at a different price.
If you are lucky enough to invest in an issuance with a coupon of 7.2% or more and hold it directly while reinvesting the coupon payments, you will double your money every 10 years. Here are a couple of recent examples.
Pacific National subordinated hydrid
This subordinated bond offers compelling value, trading at an attractive yield of around 8% that is underpinned by resilient fundamentals and a supportive shareholder base.
The recent hybrid issuance qualifies for 50% equity credit, improving credit metrics immediately. In addition, the Queensland cyclone’s impact on operations was minimal and coal pricing appears to have bottomed with a solid demand outlook.
EBITDA is expected to grow 3-4% a year, aided by CPI-linked contracts, cost-out initiatives ($65 to $85 million), and asset sales ($150 million). We remain confident in the company’s credit trajectory.
ClearView Wealth subordinated bond
ClearView have a subordinated bond with a floating rate coupon of +350 and a current coupon of 7.6%. This has upside as a potential takeover candidate.
ClearView started out as NRMA Life in 1976 but relaunched as ClearView in 2010 under the current ownership. The company is now a pure-play life insurer after divesting its wealth and advice businesses, cleaning up the story for potential acquirers.
The global life insurance market is highly consolidated, with only a few major international players that are actively seeking growth opportunities. Similar past takeovers, such as Dai-ichi Life’s acquisition of Partners Life in 2022 or Dai-ichi/TAL’s recent purchase of a 15.1% stake in Challenger highlight continued consolidation in the sector.
Attractive potential returns and easier access
Even if you were to spend the coupon payments instead of reinvesting them, an investment of $500,000 in an issue with a 5% yield and 10 years until maturity could see you collect $250,000 in coupon payments and the return of your original $500,000 at the end.
Investment managers that specialise in this asset class can provide wholesale investors with access to issuances from large ASX-listed names with good structures, on which banks have often already done due diligence.
Deals that have institutional support are also preferred because having sophisticated and large investors in the book build process increases our confidence that the offer is competitively priced.
Partnerships between providers and platforms like Netwealth and HUB can give advisers and their investor clients access to fixed income investment opportunities, including over-the-counter bonds.
Advisors using these platforms now have access to over 500 bonds in parcels of $50,000, making it an affordable option and one that provides valuable portfolio diversification. This is quite an easy way to access investment grade corporate bonds, and we have seen growing interest from financial advisers.
Jenna Hayes is Head of Sales and Executive Director, Capital Markets at Income Asset Management. This article is for general information only and does not consider the circumstances of any investor.