Investments in corporate bonds have flown under the radar as people have shied away from debt instruments, but steady rates of income, higher interest rates and ease of access have made them a compelling offering, a global manager has argued.
Schroders head of credit Helen Mason said public credit, which covers bonds and debt instruments issued by public companies, is overlooked because of negative connotations around those terms.
“Public credit makes some people afraid because they hear the word debt, but don’t necessarily realise it can be a good thing like getting a mortgage, which is not a bad thing, but a good thing for the future,” Mason told smstrusteenews, adding those entities issuing these bonds are usually high quality.
“The composition of the Australian public credit universe has a lot of issuers that are high-quality infrastructure utility businesses with inflation-linked earnings, such as tolls or regulated utilities that have a maximum allowable revenue framework and an interest rate component baked into that.”
She pointed out the Australian market was the third largest in the world for the issuance of public credit investments after the United States and Europe and is over $1.1 trillion, much of that coming from wholesale investors, but with more coming from retail investors who can now access the market via managed funds or exchange-traded funds.
While interest rates would be an area of concern for many investors, increases are often factored into public credit investments as part of their return mode, she noted.
“Corporate Australia is well placed for interest rate rises because the exposure we are taking is to things like the ports, airports, the banks themselves, rail tracks, transmission lines, distribution poles and wires, which have CPI (consumer price index) linkage factored into them,” she explained.
“Even with rates on hold we’re starting from an elevated position as yields are in an elevated position today, and so without any rate cuts in the future, we’re expecting corporate credit to maintain its levels of income, which is competitive to other asset classes such as equity dividends.”
She said those levels are around 6 per cent, which is attractive to credit investors seeking cash flow, and income will be driven by changes to consumer spending.
“If you think about a high inflation environment, what does the consumer do? They tend to trade down and stop spending money at restaurants, but buy more at the supermarket to eat at home. If you think of names like Wesfarmers with its Bunnings income, they’re defensive retail earnings as opposed to the cyclical retail earnings, whereas those discretionary business really suffer in a downturn, so we don’t have exposure to those types of assets,” she indicated.