Understanding fixed interest in volatile times
While fixed interest is a lower risk investment, fixed interest returns can still move up and down like other investments.
It’s common knowledge that the value of shares and other assets can fluctuate. However, what some investors may not know is that fixed interest securities (also known as bonds) can deliver negative returns, so many investors aren’t aware that this is possible.
A fixed interest security is a loan by an investor to a company or government that wants to raise money.
Investing in the Fixed Interest option is quite different to putting money into a term deposit or in cash. It’s important to be aware there is no set rate of return on the Fixed Interest option.
Some of the main factors that affect fixed interest security prices include changes in prevailing/market interest rates and interest rate expectations. A fixed interest security price will always move in the opposite direction to interest rates, so a higher interest rate (or yield) usually causes a fall in fixed interest prices.
Returns from fixed interest securities are generated from two key components:
- The interest received, and
- The capital movement (or price change) of the fixed interest security.
When the fixed interest security is issued, it’s set at a fixed rate. This is where the term ‘fixed interest’ is derived. Importantly, it’s the value of the regular interest payments that is ‘fixed’ and not the market value of the security as a whole. As such, when interest rates rise significantly, it’s possible for fixed interest securities to record negative returns, as we’ve seen more recently.
For example, a $100 investment in a fixed interest security with a 3% interest rate would pay $3 dollars in interest per year. If the price of the fixed interest security doesn’t change, the return on the investment in the security (or bond) would be 3% per year. However, if interest rates were to rise to the point where the capital value of the security fell to $96, then even with the $3 interest payment, the return on the investment is still a loss of $1 for the year.
It’s important to focus on your super being a long-term investment. We use an actively managed strategy aimed at providing consistent, strong returns over the long term.
Things to consider if you're only invested in the Fixed Interest option
Suitability of this option
If your goal is to maintain long-term capital security value, while earning a rate of return above that of term deposits or from a cash management trust, and your minimum investment timeframe is 3+ years.
The return objective of our Fixed Interest option is to outperform returns from a mix of the Australian and overseas bond markets (as measured by a benchmark consisting of the Bloomberg AusBond Composite Bond Index, the Barclays Capital Global Aggregate Index [hedged] and cash).
To achieve returns after tax and fees at least in line with the inflation rate (as measured by the Consumer Price Index [CPI]) over rolling 10-year periods.
The risk level of our Fixed Interest option is medium. The likelihood of a negative annual return is 2.2 in every 20 years (based on the Standard Risk Measure, visit investment FAQs for more.
Watch our video with Chief Investment Officer, Suzanne Branton, as she breaks down the Fixed Interest option.
Any questions? Get in touch online or give us a call on 1300 360 149.