The Performance Of Corporate Bonds And Hybrids During The Equity Sell-Off
David Bassanese | Nov 01, 2018 15:42
Originally published by BetaShares
The recent decline in equity prices has once again highlighted the importance of asset allocation and portfolio diversification. As will be demonstrated in this note, although corporate bonds and hybrid securities have some exposure to credit risk, their valuations have held up relatively well during the recent period of equity market turmoil. This highlights their usual defensive income qualities for investors seeking to manage their risk across a diversified multi-asset portfolio.
h2 A wild ride for stocks, less so for corporate bonds and hybrids/h2As seen in the chart below, Australian equities have endured some notable declines over the past year or so, with the recent 10% decline in the S&P/ASX 200 Index from its high of late August the most pronounced. As also evident, the decline in total returns for corporate bonds and hybrids securities has been nowhere near as great.
Note: Past performance is not indicative of future performance. You can’t invest directly in an index.
The performance of corporate bonds and hybrid securities tends to be less volatile than that of equities over time for two critical reasons. For starters, investors in corporate bonds and hybrids stand ahead of equity investors in the corporate capital structure – in the event of a corporate insolvency, bond and hybrids holders have a somewhat higher probability of getting at least some capital return (1). This makes their valuations less subject to concerns over corporate performance during economic downturns.
Secondly, the income payments promised to corporate bond and hybrid security holders – upon which their valuation is based – tend to be more reliable over time than dividend payments to equity investors. More generally, equity valuations are much more sensitive to changing investor perceptions of corporate profitability over time.
Of course, in exchange for this reduced volatility in returns, both corporate bonds and hybrids tend to offer somewhat smaller returns than equities over time, as the latter also benefit from growth in corporate earnings and dividends.
h2 Attractive Defensive Income through exchange traded products (ETPs)/h2As evident in the chart below, investors seeking attractive income opportunities – with less downside risk exposure than equities – have a number of options to choose from along the risk-return spectrum.
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Note: Yields are variable and may be lower at time of investment.
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