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Trusted Diversification | Stable Income | Capital Preservation
As we approach the eagerly anticipated end of the rate hiking cycle, investors are considering how to position portfolios for what comes next.
While time will tell whether central banks reached the top of the cycle in November 2023, investors who wait for the first rate cut for confirmation could stand to miss out on the potential for typically strong bond returns that often materialise in the preceding period.
Regardless of the path ahead for cash rates, government bonds remain a vital diversifier, particularly in times of uncertainty where a source of reliable government-backed income, liquidity and capital preservation can provide a strong foundation for portfolios.
Charlie Jamieson, Chief Investment Officer discusses how government bonds can be a valuable source of stable, government-guaranteed income, offering capital preservation, as well as a reliable source of liquidity during financial market crises.
Government bonds are a natural choice for defensive allocations in an investment portfolio, given they provide stable income with capital preservation and they are backed by the consistency of government cash flows.
This makes them a very solid foundation in building out a diversified portfolio and they can be a wonderful source of liquidity in moments of crisis, as we saw in early 2020 in the COVID period.
That's important as we come around into 2024 with, obviously, interest rate hikes being broadly complete the world over after an enormous interest rate hiking cycle.
Inflation is now moderating the world over after a huge COVID peak, but that is coming down consistently around the world. The lag effects from monetary policy interest rate hikes are still coming into economies, slowing economic activity, making this a dynamic cycle.
For investors, it is offering a wonderful opportunity to reestablish government bond allocations with yields significantly higher than we've seen back to almost the GFC period.
It's important to think this through in a forward context because as the economy slows, the government bond market is very likely to move ahead of actual policy interest rate cuts, should they materialise.
So, waiting for certainty about peak cash rates after such a large cycle might mean that you're missing out on those easy initial returns.
A source of capital preservation and stable income, backed by government
A trusted source of liquidity in all market conditions
A hedge against the riskier parts of investors’ portfolios
Founded in 2013, Jamieson Coote Bonds is a privately owned specialist high grade bond manager, focused on providing investors with genuine portfolio defence and liquidity across all market cycles, with a suite of actively managed government bond portfolios.
Jamieson Coote Bonds’ business is investment led and centred around actively managing high grade bonds for the long term to produce superior risk-adjusted returns for investors, aiming to be the manager of choice for investors seeking a true defensive and disaggregated fixed income allocation within portfolios.
The CC JCB Active Bond Fund provides superior liquidity, credit quality and capital preservation.
FIND OUT MOREThe CC JCB Global Bond Fund provides diversification through exposure to Australian and G7 Governments.
FIND OUT MOREThe CC JCB Dynamic Alpha Fund provides diversified returns, uncorrelated to traditional investments.
FIND OUT MOREBonds are simply a legal ‘IOU’ where an investor (lender) loans money to a Government or Firm (issuer) in exchange for a predetermined interest rate of return, known as the coupon rate. When the bond matures, assuming no default from the issuer, the principal is returned to the lender.
The coupon rate is the percentage of a bond’s principal which is paid to lender on a pre-defined frequency, usually semi-annually.
Depending on the quality of the bond issuer, bonds can provide diversification to investment portfolios because of their typically low/negative correlation to equities, stable income, capital preservation and their potential to remain liquid during crisis.
Inflation erodes the purchasing power of a bond’s future cash flows. Higher inflation may lead to higher interest rates from central banks which can reduce the price of existing bonds.
Government bonds are considered “risk-free” because they’re backed by the full faith and credit of the issuing government. This means the government guarantees to repay the bond’s principal and coupons, making default highly unlikely. That said, not all nations are necessarily stable, making issuer selection a critical consideration.
Duration represents a weighted-average of the cash-flows over the life of a bond. Measured in years, it gives the investor an idea of the time over which the yield will play out. It can also provide a sense of a bond’s estimated sensitivity to a standard ±1% change in interest rates. For each year of duration, a percentage increase in rates will reduce a bond’s price by a percent.
Bond prices and interest rates tend to move in opposite directions. So, when interest rates rise, a bond’s price tends to fall (and vice versa). If , for example, you held a bond that pays a 4% interest rate, and rates rise, that original 4% may no longer look as attractive when compared to other market offerings.
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James Biggins
Head of Key Accounts – VIC | SA | WA | TAS
M: +61 419 093 082
Email James
Phelim O'Neill
Head of Key Accounts – ACT | NSW | QLD
M: +61 436 029 775
Email Phelim
Sam Mirls
Distribution Director - QLD
M: +61 422 777 909
Email Sam
Georgia Tourvas
Research & Key Account Manager
M: +61 423 321 614
Email Georgia
Channel Investment Management Limited ACN 163 234 240 AFSL 439007 (‘CIML’) is the Responsible Entity and issuer of units in the CC JCB Global Bond Fund ARSN 631 235 553 ('the JCB Global Fund') and the CC JCB Active Bond Fund ARSN 610 435 302 (together ‘the Funds’). The JCB Global Fund invests into the CC JCB Active International Bonds Segregated Portfolio (‘Underlying Fund’), which is a sub-fund of CC Global Access SPC incorporated as a Cayman Islands exempted segregated portfolio company. The Investment Manager of the Underlying Fund is JamiesonCooteBonds Pty Ltd ACN 165 890 282 AFSL 459018 ('JCB'). Neither CIML nor JCB, their officers, or employees make any representations or warranties, express or implied as to the accuracy, reliability or completeness of the information contained in this report and nothing contained in this report is or shall be relied upon as a promise or representation, whether as to the past or the future. Past performance is not a reliable indication of future performance. This information is given in summary form and does not purport to be complete. This information has been prepared for the purposes of providing general information without taking into account any particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, any relevant offer document and in particular, you should seek independent financial advice. The Responsible Entity has issued a product disclosure statement (‘PDS’) for each the Funds which contains important information and is available here. For further information and before investing, please read the PDS and any updated information.
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