An article in The Australian today highlights the rationale behind the current paradigm that “shares are best”, “debt is bad”. The global fixed interest head of Colonial First State (CFS), Warren Bird, sinks the notion that Australians should have access to a deep, mature and liquid corporate bond market:
We should stop trying to artificially create an Australian bond market and instead encourage Australian companies to fund themselves as cheaply as they can where ever they can from around the world.
Given that there are $1.4 trillion plus (projected to be multi-trillion in the decades ahead) in superannuation savings at the beck and call at junior and senior corporates for funding possibilities, thus retaining the investment and spending funds internally: should Australian’s continue to allocate their assets into the 2nd largest speculative market in the country, producing sub-inflation results?
According to Warren Bird:
We really are concerned that retail investors see a headline yield and think that’s all there is to it. The equity mentality transferred over into corporate bonds is dangerous.
Indeed there is a great risk that investors treat bonds like shares, helped along by an industry more than willing to create new financial instruments and methods that turn primary investment assets into speculative endeavours.
Maybe the real danger is that retail investors finally work out that the standard industry paradigm of a “balanced” fund having more than half of its assets in volatile equities is fundamentally flawed. And then they’ll start switching them to the plain, vanilla, corporate debt market whose total asset allocation has been decimated by this paradigm:
Even though the risk-adjusted returns have been superior over almost every timeframe:
But Mr Bird does touch on a crucial point that there is more to an investment than its current yield, and evaluating underlying risk is something that both retail investors and institutions have a poor record of doing.
Interestingly, CFS is happy to own Italian debt yielding 7%, so maybe paradoxically he is right.