THE INVESTOR’S GUIDE TO ADDING INCOME AND SECURITY TO …€¦ · well diversified investment...

THE INVESTOR’S GUIDE TO ADDING INCOME AND SECURITY TO YOUR PORTFOLIO

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2© Copyright 2019 Australian Corporate Bond Company Ltd


1 2 3 4 5 6 7

CONTENTS

4 HOW XTBs OVER CORPORATE BONDS COMPARE ............................p.15

3 FIVE REASONS TO LOOK AT XTBs OVER CORPORATE BONDS ......p.11

5 OPTIONS FOR ACCESSING CORPORATE BONDS ...............................p.19

6 HOW TO USE XTBs TO ACHIEVE YOUR OBJECTIVES .......................p.23

7 HOW TO BUY AND SELL XTBs ....................................................................p.27

2 CORPORATE BONDS AND XTBs ................................................................p.8

1 THE CHALLENGE ..............................................................................................p.3

1. THE CHALLENGE

© Copyright 2019 Australian Corporate Bond Company Ltd


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For many investors it’s a constant challenge to find the

balance of income, growth and security. A balance that

is right for their risk appetite and investment objectives.

Interest rates are at record lows. This makes it increasingly

difficult to maximise portfolio returns, without taking on too

much risk.

Investors are increasingly recognising the importance of

using fixed income investments to achieve the desired

balance. Fixed income is often referred to as the anchor

of a diversified portfolio. This is because it delivers

predictable, regular income with capital stability.

However, investors may not realise there’s more to fixed

income than term deposits and bond ETFs or managed

funds.

Term deposits rank high on security; however, returns are

low and may even go lower. Bond ETFs and managed

funds potentially deliver higher returns than term

deposits, however, they lack the level of predictability

that fixed income should provide.

So, what other options are available?

Corporate bonds are also part of the fixed income asset

class. They can deliver predictable income, capital

stability and competitive yields. Like other fixed income

investments they are especially important in a volatile

market. They are widely used by institutional investors

to form the defensive portion of portfolios. However,

historically they have not been accessible to all investors

given the minimum investment is often $50,000, and can

be as much as $500,000.

How to balance income, growth and security

1. THE CHALLENGE 2. CORPORATE BONDS AND XTBs

3. FIVE REASONS TO LOOK AT CORPORATE BONDS

4. HOW CORPORATE BONDS COMPARE

5. OPTIONS TO ACCESS CORPORATE BONDS

6. HOW TO USE XTBs 7. HOW TO BUY AND SELL



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Australia: A global anomaly

When it comes to having a balanced allocation to bonds,

Australia is a global anomaly – among OECD countries

we are close to bottom. Aside from Poland, every other

country have a more balanced allocation between

shares and bonds.

Many Australian investors have a heavy allocation to

shares and to term deposits. This approach to investing is

known as a barbell portfolio. It has high risk, high returns

at one end and low risk, low returns at the other end, but

nothing in the middle. Perhaps this is the result of limited

awareness of how to access the returns of bonds?

In this guide, we’ll look at how the features of corporate

bonds stack up against other fixed income investments.

We will also look at the way investors can access the

performance and benefits of corporate bonds. One of

the options discussed in this guide is XTBs.

We hope to help you to decide if the blend of income

and predictability XTBs can provide could help you

achieve your investment objectives.

The OECD average allocation to bonds and bills is 40%, Australia has just 10% allocated to bonds Source: OECD Pension Markets in Focus (2017)








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Introducing Exchange Traded Bond units (XTBs)

XTBs are securities which represent a fraction of a

corporate bond, traded on ASX.

Each XTB is backed by a single underlying bond. So,

each XTB effectively mirrors the coupon and face

value payments of a specific bond. It’s this one to one

relationship that makes XTBs unique.

XTBs bridge the gap between bond issuers and direct investors

Throughout this guide we refer to XTBs in the context

of holding to maturity and explain why this is important.

We’ll look at the features of corporate bond XTBs and

other fixed income investments. We look at how the

benefits of exposure to corporate bonds stack up to a

range of comparable financial products.

We recommend you read the PDS and seek your own

professional advice, to see whether XTBs might be

suitable for you.

ASXIndividual Corporate

Bonds

XTBs

ASX

TRADED

YTMAGL








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Your tolerance to risk is an important factor to consider

before making any investment choice. Everyone has

a different tolerance to risk and should aim to be

comfortable with the level of risk associated with their

investment selections.

The risk / return chart below demonstrates where each

type of investment fits on the risk vs reward spectrum.

Balancing the choice of risk versus return

TIP: A general rule to investing – as returns increase, so too does the risk. Investors should be cautious of any claims that an investment is low risk AND high return.






RIS

K

Lower

Risk vs Reward

BANK & TERM DEPOSITS

GOVT. BONDS

SUBORDINATED BONDS

Fixed income

HYBRIDS

PROPERTY TRUSTS

EQUITIES

WARRANTS

OPTIONS

CFDs

REWARD Higher

Higher

KEY

SENIOR CORPORATE BONDS

2. CORPORATE BONDS AND XTBs



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If a company wants to borrow money to fund growth, or other investments, it has two options; borrow from a bank, or issue bonds.

Corporate bonds are basically IOUs that:

1. Pay back the loan when the bond matures – known as the ‘principal’ or ‘face value’.

2. Deliver a steady stream of income, normally paid quarterly or semi-annually throughout the life of the bond – known as the coupon.

Corporate bonds can pay either a fixed or floating rate of return.

Corporate bonds generally offer more return for the additional risk of loaning to a company, rather than a bank. But investors can minimise this risk by sticking with top ASX, investment-grade issuers.

XTBs make access easy, cost-effective and flexible

XTBs effectively mirror an underlying corporate bond. In this guide we’ll use them to compare and contrast a range of fixed income products.

XTBs trade in small to large parcel sizes, meaning they are accessible to all investors – not just those with very large portfolios.

Because XTBs are traded on the ASX, they can easily be bought and sold at any time, so you can access your money should you need to.

What are corporate bonds?

ASX

TRADED

7. HOW TO BUY AND SELL1. THE CHALLENGE 2. CORPORATE BONDS AND XTBs







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Corporate bonds: not just for retirees

XTBs can form an important component of any

well diversified investment portfolio:

• Providing exposure to individual corporate

bonds.

• While you’re in the accumulation phase,

income generated by XTBs can provide a

solid, defensive base.

• When growth assets such as shares and

property are volatile, a steady stream of

income can help keep your portfolio on track.

• When you reach retirement it’s income that

funds everyday spending.






3. FIVE REASONS YOU SHOULD BE LOOKING AT XTBs OVER CORPORATE BONDS



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Five reasons you should be looking at XTBs over corporate bonds

1. You want to remain defensive, but optimise your income

Many people use term deposits as the

primary defensive allocation in their

portfolio. However, TD rates are currently very low and

may go lower.

The current difference between TD rates and XTB yields

means that XTBs can offer higher income than TDs.

As they are still fixed income investments, this uplift can

be achieved without a significant increase in risk.

TDs may enjoy the benefit of protection under the

Financial Claims Scheme.

2. You want to preserve capital, but also want flexibility

You don’t want to put your capital at risk, but if

you’re heavily invested in shares and hybrids

you may have to. Higher risks are acceptable for growth

assets, but not for the defensive part of your portfolio.

TDs have no volatility. So, the trade-off to consider is, “does

moving to higher-yielding, more flexible corporate bond

XTBs stack-up in return for a small increase in volatility?”

With TDs you are lending money to a bank, you’re locked

in for the entire term. By accessing corporate bonds

through XTBs, you lend money to a top ASX100 company.






https://www.apra.gov.au/financial-claims-scheme



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You can hold your XTB to maturity, preserving your

capital. Or you can sell some or all of your XTBs on

ASX if you want to realise your investment, before

maturity. Selling before maturity removes some of the

predictability and you may not be able to achieve your

desired price.

3. You get the face value back on a set date

When corporate bond XTBs mature, you

get the face value back. Remember, this is

in addition to the regular coupon income

that you have received during the life of the XTB. This

may sound obvious, but it’s fundamental. Volatility only

matters if you sell early.

4. You like the simplicity & transparency of ETFs, but want predictable returns

Bond ETFs are perpetual investments

– they don’t have a date when they

mature. This means they can’t provide that same level of

predictability of returns, particularly in the long term.

Also, they are pooled products – the ETF manager adds

and removes new bonds, sometimes on a daily basis and

there could be hundreds of bonds included. That’s good

for your diversification, but perhaps more importantly, it

means you don’t know what your return will be. It also

means you lose that certainty of what you’ve invested in.

Don’t forget it’s knowing your cash flows when you

invest that’s at the heart of fixed income.

2020








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5. XTBs give everyone access to the benefits of bonds

Corporate bonds trade between banks

and asset managers in $500,000

minimums. In contrast, XTBs come in $100 securities.

This allows all investors to consider adding the returns of

individual bonds into their portfolios.

XTBs are available over both fixed and floating-rate

coupon bonds. And the range covers many of Australia’s

largest companies. This means there is an XTB to suit a

wide range of investment objectives.






GOVERNMENT BONDS

HYBRIDS ETFS AND MANAGED FUNDS

TERM DEPOSITS

4. HOW XTBs OVER CORPORATE BONDS COMPARE TO OTHER FIXED INCOME INVESTMENTS



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Looking for diversification and income?

Australian government bonds can diversify your

investment portfolio, whilst achieving a source of

reliable and regular income.

A strong economy means investments in Australian

government bonds carry very low risk. As a result,

Australian government bond yields are currently

very low; lower in fact than most term deposit rates.

There are ways of making your cash work harder. If

you’re looking for a low risk investment that provides an

attractive and stable income, XTBs might

be the answer.

XTBs could provide diversification and an income boost

Typically, an investment in XTBs provides access to

the higher returns from corporate bonds, compared to

government bonds.

This can boost the income generation in an investment

portfolio. A critical consideration with returns from many

fixed income investments being so low.

Government bonds

GOVERNMENT BONDS

XTBs

Low risk* PPP PAttractive levels of income O PRegular income payments P P

Easily traded on ASXSome government bonds are available

as AGBsP

Choice of bond issuer O P*In absolute terms, both government bonds and XTBs are low risk. Government bonds are considered the lowest possible risk.








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If you’re looking for a term deposit, you’re likely looking

for security PLUS the highest interest rate you can find.

Currently, even by shopping around, you’re unlikely to

find yields much higher than 2.5% p.a*. These are close

to the lowest ever TD rates**. Nobody can be blamed for

wanting their cash to work harder for them.

XTBs could provide the same known cash flows with an income uplift

It is possible to get your cash working harder. If you’re

looking for a low risk investment that provides an

attractive and stable income, XTBs might be the answer.

Like any investment, there may be fees associated with

buying or selling XTBs, which may impact on the return.

Term deposits

TERM DEPOSITS XTBs

Low risk*** PP PYields above 2.5% O PRegular income payments P PAnytime access to savings without penalty O P

Financial Claims Scheme may apply P O

Compare TD returns with XTBs

*Canstar – $10,000 3-6 month best TD rate top 4 bank and ACBC 1 Mar 2019 **RBA Aug 2017

HIGHEST TD RATE HIGHEST XTB YIELD

2.1%*

3.28%*

***In absolute terms, both TDs and XTBs are low risk. TDs may enjoy the benefit of

protection under the Financial Claims Scheme, making TDs the least risky of the two.










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Hybrids

HYBRIDS XTBs

Low risk O PAttractive levels of income P PKnown income and principal payments O P

Effective diversification from shares O PKnown maturity date and value O P

Hybrids have some of the attributes of equities and some of the attributes of fixed income. So strictly speaking they are not considered fixed income. This is in part because coupons are deferrable and they can continue in perpetuity. Some investors utilise them for income and diversification. But do hybrids really have a place in the defensive component of a portfolio?

• Hybrids often behave more like shares than bonds, particularly when the share market is weak. So, they shouldn’t be viewed as defensive or stable investments.

• Hybrids don’t provide certainty of income. As with shares, dividends are optional, making cash flows uncertain. Defensive assets should provide steady, reliable income.

• Investors don’t know when their capital will be repaid. The maturity date of hybrids isn’t fixed and can be deferred by the issuer or regulators. Significant capital losses could be incurred if you need to access your money before the maturity date.

• Hybrids can convert to shares at the discretion of the issuer – the investor has no control. The diversification benefit is lost and investors can be left with even more shares and a more concentrated portfolio.

XTBs offer a better defence

There is a more effective way of gaining exposure to defensive assets. A way you can also achieve greater diversification, if you’re looking for a low risk investment that provides an attractive and stable income, XTBs might be the answer.






5. OPTIONS FOR ACCESSING CORPORATE BONDS



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All investors can now access corporate bond returns

We’ve looked at reasons for investors to consider

corporate bonds. And we’ve seen how they stack up

against other fixed income, defensive investments.

We know that Australians are underweight in bonds

compared with OECD peers. We also know that in part

this has been due to a lack of access to bonds for ASX-

based investors.

But, that’s all changed

There are now many ways for investors to incorporate

corporate bond investments into their portfolios.

Even better, many of the choices come with the added

benefit of being traded on ASX – making them both

transparent and accessible to everyone.

Corporate bond returns on ASX have been unlocked for retail investors








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Corporate bonds – Over The Counter (OTC)

OTC CORPORATE BONDS

XTBs

Diversification benefit P PRegular income payments P PTransparent pricing O PNo minimum investment* O PEasily traded on ASX O PNo custodian required O P

*ASX may impose a $500 minimum initial investment

Corporate bonds have always been available to investors

traded over-the-counter.

However, for most investors, trading corporate bonds in

this way is out of our reach. If you have millions of dollars

to invest, you can choose from a wide range of corporate

bonds issued by successful Australian companies. Whilst

they may trade in parcels of $50,000, more commonly

its $500,000 at a time. This leaves them inaccessible for

most investors.

Because OTC corporate bonds aren’t traded on

exchanges, there is no pricing transparency. Investors

are beholden to their broker who quotes prices on a

transaction-by-transaction basis. This effectively makes

fees and commissions difficult to decipher.

XTBs offer greater flexibility and transparency

There is a way for everybody to access the returns from

corporate bonds, irrespective of the amount you have

to invest. If you’re looking for a low risk investment that

provides an attractive and stable income, XTBs might be

the answer.








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Both bond ETFs and Managed Funds can diversify your

investment portfolio and provide a source of income.

However, this income isn’t known and the value of your

investment can fluctuate.

XTBs offer predictable cash flows and known returns, ETFs can not

Unlike bond ETFs and managed funds,

XTBs provide a level of certainty for the

duration of your investment (subject to no

issuer default).

You’ll know how much income you’re

going to receive, the date that you’ll be

paid the income, and the value that you’ll

be paid back upon maturity. This gives

you greater predictability and helps you to

match your expenses with your income.

BOND ETFsBOND MANAGED

FUNDSXTBs

Regular, known income payments O O PAnytime access to savings without penalty P O P

No minimum investment* P O PEasily traded on ASX P O PCapital preservation by holding to maturity O O P

Diversification through a single trade P P OProfessionally managed, someone else chooses the investments P P O

Bond ETFs and Managed Funds

*ASX may impose a $500 minimum initial investment

Tip: Bond funds and ETFs are perpetual investments. A fund may start the year and end the year with a totally different set of bonds.






6. HOW TO USE XTBs TO ACHIEVE YOUR OBJECTIVES



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XTBs could help you achieve your objectives

An investment in corporate bond XTBs could provide

you with greater control over the defensive component of

your portfolio. It could enable you to generate a higher

level of income to support current or future expenditure.

The cash rate is at historic lows and looks likely to

remain subdued for the foreseeable future. This means

it is more important than ever to make your investments

work harder for you.

An investment in XTBs might be the answer. As with

any investment, it’s important to understand the risks

involved. It’s therefore recommended you read the PDS

and seek your own professional advice, to see whether

XTBs may be suitable for you.








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• Chose a Starter Portfolio or select up to 10 XTBs

• Chart the income you would receive year to year and over the lifetime of your chosen bonds

• Compare the returns from XTBs to your existing assets

• Click below to build your portfolio and see how XTBs could help you achieve your investment goals

BUILD YOUR PORTFOLIO

XTB portfolio

Build a portfolio of XTBs to see exactly what income you could receive






https://xtbs.com.au/cash-flow-tool/

https://xtbs.com.au/cash-flow-tool/



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Qantas(QAN)

AGL Energy(AGL)

Macquarie(MQG)

Telstra (TLS)

Lend Lease(LLC)

Westpac (WBC)

NAB(NAB)

Make sure you’re aware of the risks Like any investment, there are risks associated with

XTBs. Each XTB is exposed to the creditworthiness of

the underlying bond issuer, if they default then you may

not recover all of your investment.

The known outcomes of investing in bonds and XTBs is

generally only available when you hold to maturity, there

may not be sufficient liquidity if you want to sell early and

you may not be able to achieve your desired price if you

do so. XTBs and the underling bonds are not

guaranteed under the Financial Claims Scheme.

All XTBs are over top ASX companies








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7. HOW TO BUY AND SELL XTBs



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Each XTB mirrors the characteristics of a single

underlying bond and there are no minimum amounts*.

Because XTBs are traded on ASX, they can easily be

bought and sold at any time. You can access part or

all of your money at any time. There are no ongoing

management fees payable to us once you’ve invested.

More on XTB fees.

Buying XTBs is as easy as:

1: Select which XTBs you wish to purchase.

2: Read the relevant Product Disclosure Statement (PDS) for the XTBs you have selected.

3: Transact in exactly the same way you do with shares. Trade via your stockbroker, financial adviser or online broker.

If you want any further information about XTBs, contact

us on 1800 995 993, where a member of our team will

be ready to assist you.

How to buy and sell XTBs

Step 2

REVIEW AVAILABLE INFORMATION

Step 3

TRADE USING YOURNORMAL BROKER

Step 1

SELECT YOUR XTBs

* ASX may require a $500 minimum initial investment






https://xtbs.com.au/xtb-fees-explained/



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Australian Corporate Bond Company Ltd (ABN 34 169 442 657, Authorised Representative No.: 469037) (“ACBC”) is an Authorised Representative of Theta Asset Management Ltd (ABN 37 071 807 684, AFSL No.: 230920) (“Theta”). Theta is the Responsible Entity of the Australian Corporate Bond Trust (ARSN 603 010 779) and the issuer of the Exchange Traded Bond Units (“XTBs”). ACBC is the Securities Manager of the XTBs. ACBC and Theta will earn fees for making the XTBs available to investors, which is payable at the time that an Authorised Participant applies for an XTB.

No units will be issued until such time as ASIC and ASX have admitted that Class of XTBs to quotation. Applications will only be accepted from Authorised Participants pursuant to the relevant XTB Product Disclosure Statement (“PDS”). All other investors must acquire XTBs on ASX through an Authorised Participant or their Broker.

This ebook does not constitute an offer of XTBs to any person. The distribution of this ebook or any other material relating to XTBs, including any XTB PDS, to persons outside of Australia may be restricted by law and any person who comes into possession of such documents should seek their own advice on, and observe any such restrictions.

ACBC is solely responsible for the contents of this ebook. The contents of a PDS and this ebook are subject to change and ACBC makes no warranty, express or implied, as to the completeness of any statement contained herein nor does it represent that this ebook contains all of the information that an investor may require in order to assess the merits of an investment in XTBs or any other financial product mentioned in the ebook.

The information contained in this ebook is general in nature and does not take into account any particular investors personal circumstances, objectives or needs. It is not personal financial product advice. You should read the relevant PDS and consider, with or without the assistance of your professional advisers, whether an investment in XTBs is appropriate, having regard to your own personal circumstances.

XTB® is a registered trade mark of Global Bond Exchange Pty Ltd, a related body corporate of Australian Corporate Bond Company Limited.

©Copyright 2019 Australian Corporate Bond Company Ltd ABN 34 169 442 657. All rights reserved 2019.

Disclaimer






THE INVESTOR’S GUIDE TO ADDING INCOME AND SECURITY TO …€¦ · well diversified investment...

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