Can my SMSF buy Bonds via FIIG Securities?
Yes, your SMSF can buy bonds via FIIG Securities. FIIG is one of a number of Australian bond market providers registered with ASIC that provide access to both primary and secondary bond markets for a range of investors, including Self Managed Super Funds.
Please note that SMSF Australia is entirely agnostic as to which provider you or your financial planner chooses to use. As a firm, we have developed a number of educational SMSF blogs, including this one, to help clients understand how different products operate from a practical and compliance perspective across various providers.
Our firms’ services are limited to accounting and compliance matters, and we do not endorse any particular investment product, provider or investment strategy. SMSF Australia does not receive commissions, referral fees or any other form of incentive from external parties and operates on a strict fee-for-service basis.
What Are Bonds?
Before we look at FIIG in more detail, it is important to understand what bonds are and how they generally fit within an SMSF’s investment portfolio.
At their core, bonds are a type of fixed income investment generally issued by governments, banks and larger corporations. They pay investors a regular income stream (known as the coupon or interest rate) and return the capital value of the bond at a defined maturity date, subject to issuer credit risk (for example, the risk that the government or corporation is unable to meet its obligations).
As an SMSF investment option, bonds and other fixed income products are often used to generate consistent, relatively low-risk income, particularly where investors wish to emphasise capital preservation over capital growth.
This can be particularly attractive during an SMSF’s pension phase, where meeting minimum pension payment requirements and being able to rely on regular income may be more important than pursuing higher growth investments or being exposed to fluctuations in equity markets and property cycles.
Why Consider Bonds in an SMSF?
The key reasons we see clients allocate a portion of their investment portfolio to bonds and other fixed income products are diversification and the generation of stable, predictable income streams.
Bonds have formed part of investment portfolios for many years, although they became less popular during the prolonged low interest rate environment that followed the Global Financial Crisis. In recent years, however, they have returned to favour as interest rates around the world have risen from historic lows and a number of well-known investment professionals have publicly highlighted their benefits.
One prominent example is Ray Dalio, founder of Bridgewater Associates, who has long advocated the importance of diversification and popularised the concept of the “All Weather Portfolio“, which incorporates allocations to both equities and bonds.
Historically, bonds have played an important role across market cycles and continue to be an attractive option for SMSF investors seeking diversification, capital preservation and stable income streams.
What Types of Bonds can an SMSF Buy?
Although there are restrictions on many investments that can be held by Self Managed Super Funds under the SIS Act, there is no general prohibition on investing in bonds.
Provided the SMSF and its associates do not control the bond issuer (which is generally not an issue with institutional-grade bonds given the size and scale of the entities involved), SMSFs can access a broad range of fixed income investments.
While not an exhaustive list, below are some of the more common types of bonds available in the market and a brief explanation of how they operate.
Government Bonds
They are generally considered the safest type of bond available, being backed by the full faith and credit of the issuing government. Government bonds would typically only become worthless if the issuing government were unable to meet its obligations, which is generally considered a very low-probability event for developed nations such as Australia.
Australian Government Bonds provide predictable interest payments and can generally be bought and sold with relative ease, making them a highly liquid investment.
It is worth noting that the market value of a bond will fluctuate as interest rates change. Existing bonds generally increase in value when interest rates fall, as newly issued bonds offer lower coupon rates. Conversely, existing bonds typically decline in value when interest rates rise, as newly issued bonds offer higher coupon rates.
While government bonds are generally regarded as the lowest-risk bonds available, they also tend to provide lower expected returns, reflecting the traditional trade-off between risk and reward.
Investment Grade Corporate Bonds
This category of bonds includes debt securities issued by large, financially strong companies that are generally assigned high credit ratings by agencies such as S&P Global Ratings or Moody’s.
In Australia, these bonds are commonly issued by larger organisations such as the major banks, infrastructure companies and listed real estate investment trusts (REITs).
From a risk perspective, investment grade corporate bonds are generally considered to sit between shares and government bonds. In exchange for the higher level of risk relative to government bonds, they typically offer higher coupon rates and therefore higher income returns.
Many investors view investment grade corporate bonds as providing a balance between income generation and capital stability, making them a popular component of diversified investment portfolios.
Floating Rate Notes (FRNs)
Similar to traditional corporate bonds in terms of their issuers and underlying credit risk, Floating Rate Notes (FRNs) are designed to reduce interest rate risk.
Unlike a conventional fixed-rate bond, where the coupon remains unchanged for the life of the investment, the interest rate paid on an FRN adjusts periodically based on a reference rate such as the Bank Bill Swap Rate (BBSW). As a result, FRNs are generally less sensitive to changes in interest rates, and their market value tends to remain more stable than that of fixed-rate bonds.
Instead of the capital value fluctuating significantly as interest rates rise or fall, the income received by investors generally adjusts with movements in the reference rate. For example, a Floating Rate Note paying BBSW + 1.50% would provide a return of 5.50% when the BBSW is 4.00%, reducing to 5.25% if the BBSW falls by 0.25%.
For investors concerned about rising interest rates, FRNs can provide a way to maintain exposure to fixed income investments while reducing the interest rate sensitivity associated with traditional fixed-rate bonds.
Inflation Linked Bonds
The face value (or principal value) of these bonds is linked to inflation, typically through movements in the Consumer Price Index (CPI). This provides investors with a degree of protection against inflation by increasing the value of the bond as inflation rises.
As the principal value increases, the interest payments received by investors generally increase as well, helping to preserve the real purchasing power of their investment over time. For investors concerned about the impact of inflation on their wealth, inflation-linked bonds can therefore provide an effective hedge against rising prices.
The trade-off is that inflation-linked bonds often offer lower starting yields than comparable fixed-rate bonds. This reflects the traditional relationship between risk and reward discussed earlier. By transferring a significant portion of the inflation risk from the investor to the issuer, investors are generally willing to accept a lower expected return.
Conversely, inflation-linked bonds may underperform traditional fixed-rate bonds during periods of low inflation. In these environments, the higher coupon payments available on conventional fixed-rate bonds can result in superior overall returns compared to inflation-linked securities.
How can my SMSF access Bond Markets?
Generally, most clients will buy bonds via their financial adviser who will develop a financial plan which includes listed and unlisted equities along with bonds and other alternative assets such as gold bullion. However, there is no prohibition on SMSF trustees choosing to invest directly into bonds via fixed income providers such as FIIG Securities. FIIG are one of the largest fixed income providers to the Australia market and advertise as supporting over three thousand self managed super funds with their bond investments.
Along with bond trading they also provide complimentary support such as credit research, market updates and ongoing support explaining how to develop income focussed portfolios. To learn more about how FIIG supports SMSF clients looking for fixed income options reach out to them directly here.
Bond Investments in an SMSF
To learn more about how bonds work in an SMSF from an accounting or compliance perspective checkout our resources page or reach out to one of our friendly staff today.