Why you should include global bonds in your investment portfolio
MANY investors are unaware that global bonds are an option worth considering when planning their investment portfolio. Investors tend to shy away from investments they are unfamiliar with when the reality is that once the concept is properly explained, it turns out to be not as complicated as they once thought.
Bonds are instruments issued by governments or corporations (referred to as the issuer) as a means of borrowing funds.
Bonds are debt securities. The issuer of a bond owes holders of the debt a certain sum of money (principal / face value) and is obliged to pay them interest (coupon) on specified dates (semi-annual, annual, and sometimes monthly) at a predetermined rate of interest.
Additionally, the bond will specify the maturity date, ie when the issuer will repay the full principal. These bonds are commonly negotiable, which means that ownership can be transferred in the secondary market.
Bonds are ideally suited to investors seeking a fixed rate of return over the medium to long term and there are several clear advantages that bonds have over other types of securities. The following are some of the advantages to consider:
1) Risk — The risk faced by an investor is that the issuer does not have the ability to meet their obligation. This risk can be measured by the credit
rating of the issuer, which is normally done by rating agencies such as fitch, Standard & Poor’s, and Moody’s.
If an investor is risk-averse then they would go for bonds that are rated in the investment grade category which, simply put, means that the probability of the issuer defaulting will be much less than those that fall outside of the investment grade category, commonly called junk.
The investor can measure the risk they are taking on for the return they expect to receive.
2) Liquidity — It is important to an investor to be able to sell an investment in the event of unplanned circumstances. Global bonds are traded on the market like stocks and can be liquidated within three to five working days.
3) Volatility — Bond prices are more stable than stocks over the short to medium term and are generally viewed as much safer investments than stocks.
4) Global bonds are issued primarily in foreign currency and are a good method of maintaining value.
5) Protection — Bondholders enjoy a higher level of legal protection as opposed to stockholders in the event an issuer goes into bankruptcy. The rights of bondholders are usually imbedded in an agreement which states the terms of the issue and specifies the duties and obligations of the issuer and the rights of the bondholder.
There are various types of global bonds issued which can meet the needs of all types of investors, and these all have their different terms and conditions. Do consult with any licensed investment advisor should you be interested in exploring the bond options available.
Ian Watson is vice-president, sales & marketing at Sterling Asset Management Ltd. Sterling provides financial and advisory services to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@ sterlingasset.net.jm or visit our website at www.sterling.com.jm