by
Elizabeth Moran | Oct 22, 2013
ASIC Chairman, Greg Medcraft’s comments regarding lack of transparency in the full suite of investments in superannuation funds earlier this week struck a chord. It’s very difficult for investors to assess the appropriateness of the investments if they can’t see them in their entirety.
Looking back to the global financial crisis I think part of the problem was that too many people (including CEOs of global banks) trusted financial engineers and invested in complicated investments where they couldn’t track where their funds were invested and didn’t understand the investment vehicles.
Going back to basics I think it’s important to understand “who” it is you are investing in, whether it be shares, bonds, managed funds or superannuation funds (and their complete list of investments) and be sure you understand the “how” that is the investment vehicle and how the company will use the funds to derive an income.
It’s easy to follow your money when you invest direct in bonds. A bond is simply an agreement where investors agree to invest, or more specifically “lend” their funds to the entity issuing the bonds. In return the bond issuer agrees to pay the investor interest and principal at known future dates, providing certainty and enabling investors to plan for their future.
A good example of being able to follow your money is through Australian corporate infrastructure bonds. Companies issue bonds for development and maintenance of specific projects. The assets are supported by regulatory regimes that provide cashflow certainty.
Some infrastructure bonds are inflation linked (for example Sydney Airport 2020 and 2030 and Envestra 2025 bonds) and that is because the companies issuing them can match them to inflation linked income. Other bonds are straight fixed or floating rate bonds.
The Australian companies that issue infrastructure bonds do so for specific projects. One such infrastructure company that issues both fixed and floating rate bonds is Dalrymple Bay Coal Terminal (DBCT), which is located south of Mackay, Queensland. It is the worlds’ third largest coal export terminal. The terminal services the Bowen Basin coal fields; handles 85 million tonnes per annum and approximately 20% of the world’s metallurgical coal (a key ingredient to making steel). Key customers include: Rio Tinto Coal, BHP Mitsui Coal, Anglo Coal, Xstrata and Peabody. One of the terms in the contract with suppliers is a “take or pay” clause which ensures a minimum level of use of the terminal regardless of external factors. This clause worked to protect DBCT’s income when the coal mines were flooded in 2011, thus ensuring bond holders’ income throughout. This certainty provides great comfort to investors as does the fact the bonds are rated as investment grade by the credit rating agencies.
DBCT has a range of bonds available in the secondary, wholesale market. It has a fixed rate bond due with a June 2016 maturity date showing a yield to maturity of 4.6 per cent and a floating rate note due to mature in June 2021 with an expected yield to maturity of 6.15 per cent, both from a minimum $10,000 (as part of a minimum $50,000 investment).
It is crucial when investing to understand “who” and “how” of your investments. Investors in bonds are loaning their funds to the company or entity that issues them and usually have a clearly defined purpose making them easy to follow investments.
Note: returns quoted are accurate as at 22 October 2013 and subject to change.