by
Ekaterina Skulskaya | Jul 22, 2014
Key points:
1. Seven of the top 10 performing bonds were long dated and inflation linked
2. Returns include moves in the bond price and interest income
Following the end the 2013-14 financial year, we have done the numbers and found the top performing bonds traded by FIIG over the period.
Many types of bonds were represented but at the top of the rankings one clear theme emerged: inflation protection.
Most of the top returns were generated by long dated Capital Indexed Bonds (CIBs) and Indexed Annuity Bonds (IABs). Queensland Treasury Corp, which raises funds for the Queensland State Government, issued two of the bonds on the list: the QTC 2030 CIB, which achieved the highest return in the group at 17.2% and the QTC 2033 fixed rate bond which returned a very respectable 16.2%.
Another top performer was the JEM (Southbank) Pty Ltd 2035, an indexed annuity bond issued to fund infrastructure developer Axiom Education Queensland Pty Ltd, which built the Southbank Education and Training Precinct for the Queensland State Government. The deal is now in the low risk operational phase which will continue until 2039 at which time the assets will revert back to the State of Queensland. The bond returned 17.0%.
Rounding out the Top 3 was the ever popular Sydney Airport 2030 CIB which returned 16.6%. All of the three bonds offered investors a direct hedge against unexpected inflation by linking cash flows to movements in the Consumer Price Index (CPI). This gives investors a simple means to protect the real value of their investment and offers significant diversification benefits to any portfolio. CIBs and IABs clearly dominated throughout FY13-14 with seven bonds positioned in the top ten.
Seven of the Top 10 performers were also longer dated inflation linked bonds that pay fixed coupons each quarter. The outperformance of these bonds can be partially explained by the significant rally of government-issued inflation linked bonds during the year on the back of renewed concerns about inflation.
As well as offering inflation protection, IABs suit many SMSF investors in pension pay down phase and those looking for higher cash flow investments.
However, there were a few exceptions to the inflation protection theme. Fixed rate, short dated, yield to call hybrids AXA SA and Swiss Re returned 13.4%, 11.2% while Silver Chef’s senior bond returned 10.3%. Floating rate AXA SA and Swiss Re bonds also made the list.
Both the AXA SA and Swiss Re floating rate bonds as well as JEM NSW Schools and MPC Funding indexed annuity bonds all continue to trade at a discount to their face value so investors can expect a capital gain if they buy these bonds now and hold them to call/ maturity.
Performance has been exceptional and highlights the need to have a diversified portfolio to capture gains across the different bond types.
The graph below illustrates the price history of the top five performing bonds: QTC 2030 (CIB), JEM Southbank 2035(IAB), Sydney Airport 2030(CIB), QTC 2033 fixed and Envestra 2025 (CIB).
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.
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