Why a Bond Fund is Better For Investors
Australian Bond Market (By Shannon Turnbull, 17th January 2024)
Why a Bond Fund Is a Better Idea For Investors Than Offering Them Direct Bond Access.
The inception of the iPartners Bond Income Fund was initiated by investor inquiries about bond market accessibility. This prompted a 6-month period of extensive market research aimed at devising ways for investors to gain bond market access, culminating in the launch of the iPartners Bond Income Fund.
We opted for a fund-based approach over direct bonds. This decision was influenced by the highly commoditised nature of the direct bond market where, unlike private markets, no one has a significant competitive edge.
Our primary advantage is our network, which facilitates access to primary market flows. The most sought-after bonds were aggressively pursued in the primary market by fund managers, making them largely inaccessible to direct investors.
Moreover, these bonds seldom appeared in the secondary market and when they are, the pricing available to direct holders is almost impossible to verify. Add to that minimum parcel sizes of 500k and a diversified portfolio is hard to achieve for any one holder. Any holder who wants to sell gets liquidity only at one broker’s price.
The fund approach allowed us to leverage our influence with issuers and banks, achieving better outcomes in these dynamic markets. Conversely, less popular and longer-term assets, which were more accessible to direct investors, often had active secondary market trading but came with substantial costs and wide bid/offer spreads. The large minimum investment amounts in these markets could force investors to concentrate their investments, increasing risk and cost.
Directly managing a bond portfolio also presented challenges. Frequent portfolio adjustments in response to changing market conditions could be expensive. While acquiring new bonds with favourable characteristics seemed beneficial, the associated costs could diminish the potential returns.
Therefore, we questioned the viability of owning a direct bond portfolio, which limited access to high-demand bonds and primarily offered less popular, long-dated assets.
The Bond Income Fund, in contrast, allows us to match the capabilities of larger players in the market. We utilise our network to access a diverse range of assets, positioning ourselves advantageously in the market queue, as opposed to high-net-worth investors in the direct bond market who typically find themselves at a disadvantage.
Our fund structure also provides planned liquidity events, alleviating the burden of constant portfolio reinvestment for investors. Our non-transactional fee structure removes any incentive to engage in excessive trading.
We prioritise maintaining our funds close to par value, focusing on floating rate notes to mitigate valuation fluctuations based on speculative interest rate movements. The fund invests predominantly in bonds with investment-grade ratings, delivering superior risk-adjusted returns. We concentrate on areas where we see value, rather than relying on favourable market shifts.
While direct bond investments hinge on predicting interest rate trends, a task some may excel at, we believe that managing the complexities of interest rate risk, maturity profiles, and trading decisions is more efficiently handled through a fund like ours.
To find out more email sales@ipartners.com.au or register here. https://ipartners.iplatforms.com.au/register/register-as-wholesale/