A specialist fixed-income manager has informed trustees that an SMSF portfolio allocation to bonds can provide not only capital stability, but also income reliability when compared to an equity holding when markets experience a downturn.
FIIG Securities fixed-income and investment strategy director Jon Sheridan used the experience of Commonwealth Bank of Australia (CBA) shares versus the bonds the bank had issued during the COVID-19 pandemic to illustrate this point.
“When we hit the COVID crisis, the equity lost 40 per cent of its value in about three weeks … if we have a look at the bank bond in the same period, the valuation change was almost zero,” Sheridan told delegates at SMSF Trustee Empowerment Day 2025, recently co-hosted by smstrusteenews and the SMSF Association.
“But at the end of the day, Commonwealth Bank was not expected to go bankrupt and therefore it paid the bond returns and returned investors’ capital to them and paid them the income they were due.”
He pointed out in this instance, CBA was also able to pay dividends, but its counterparts did not have the same experience.
“Commonwealth Bank got away with it, but the other three major banks were told by APRA (Australian Prudential Regulation Authority) to not pay dividends. In the same period, 100 per cent of bond interest was paid,” he said.
“So an allocation to bonds means you have a preservation of capital because the market price of your instrument doesn’t really change and you’ll also receive 100 per cent of the income you are due.”
According to Sheridan, this experience will provide a degree of certainty SMSF trustees are seeking when they have left the workforce.
“Why does this matter? For me, and I’m assuming by extension for all of you, I would like to be able to sleep at night when I’ve got my investments in retirement. That’s my goal and I want to go off and do the things I have worked hard for,” he explained.