FIIG - The Fixed Income Experts

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FIIG's top performing bonds for 2012

by Elizabeth Moran | Dec 12, 2012

Who said bond returns were boring? In the last 12 months longer dated fixed rate bonds outperformed and we saw returns on many of our recommended bonds soar. Prices across the board increased (meaning yields to maturity declined) protecting overall portfolios in a period of great uncertainty.

While we expected fixed rate bonds to outperform, what’s interesting is the outperformance of the floating rate Swiss Re and AXA SA Tier 1 hybrids which also saw a combined capital appreciation and coupon (interest payment) over the period of over 25% and 23% respectively as credit spreads contracted. As we have written many times in the past, these two names represent amongst the best value options in the A$ bond market and the performance over the last year and indeed since we first recommended the securities in 2009, has clearly demonstrated that. The world’s reduced perception of risk and chase for yield in a declining interest rate environment has also helped these bonds outperform.

Most of the outperformance has come via long dated fixed rate bonds, but there have been exceptions; the FRNs of both AXA SA and Swiss Re and the shorter dated Societe Generale fixed rate bond that matures on 20 October 2014, made the list. In fact there’s a mix of fixed, floating and inflation linked as well as domestic and international issuers.

Both AXA SA bonds, the Swiss Re FRN and the Sydney Airport 2030 inflation linked bond all continue to trade at a discount (less than the face value) so investors can expect a capital gain if they bought these bonds now and held them to maturity.

Table 1

While the returns have compressed, corporate bond returns on offer are still up to 4% above government bond rates (for senior debt) and up to 2.5% above term deposit rates (measured by FIIG’s All Maturities Term Deposit Index), although investors are taking some additional risk.

Performance has been exceptional and highlights the need to have a diversified portfolio to capture gains across asset classes and minimise losses in any one market. Managed fund returns have also been high, but well-under the 17.77% earned by Societe Generale in the last 12 months, demonstrating the possible out performance of owning the best relative value DirectBonds versus the additional diversification gained through a managed fund.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.

For more information, please call your local dealer on 1800 01 01 81.