As we close the books on another Australian financial year, we make a striking observation: Over the last eight financial years, bond returns have exceeded equity returns on average by over 250 basis points per annum.¹ Over this time, bonds also achieved this performance with almost one-fifth of the volatility of equities and have continued to demonstrate strong diversification benefits.
Yet Australian investors continue to have one of the lowest allocations to bonds in the world. According to the Willis Towers Watson Global Pension Assets Study 2016, the average Australian pension portfolio allocated only 14% to bonds, well below other developed market counterparts like the U.S. (23%), the UK (37%), Canada (31%) and Japan (57%).
Since the global financial crisis, the number of Australians age 65 and over has increased by more than 750,000, a rise of 27% in just seven years.² With this dramatic shift in demographics comes an important need for retirement income; given the investment horizon is shorter, retirement income sources should generally obtain exposure to assets with lower levels of volatility.
Australia’s Economy Pivoting
History is one thing, but what about the future?
The growth engine of the Australian economy is pivoting from mining to housing, which can be characterised as moving from a sector where Australia had a legitimate comparative advantage to a sector where it has a comparative disadvantage. The mining sector benefitted from ample sources of high-quality ore and close proximity to China, whereas the housing sector will likely eventually be weighed down by Australia’s highly levered consumer, expensive house prices and no limit on the supply response.
This “unbalanced rebalancing,” combined with investors’ increasing focus on stable retirement income, bodes well for a healthy dose of bonds in Australian investors’ portfolios in the years to come.
¹Source: Bloomberg. Data from 30 June 2008 to 30 June 2016. Indices: ASX200 Accumulation Index and Bloomberg AusBond Composite Bond 0+Index.
²Source: Australian Bureau of Statistics. Data from 30 June 2008 to 30 June 2015 (latest available demographics data).