|Investment option type
||Suits members who want to invest in a specific asset class and are less comfortable with large fluctuations in the value of their investments.
||To achieve (after Fund taxes) returns in excess of a relevant government bond index (adjusted for fund taxes) over the suggested time frame.
||To predominantly invest in securities (including but not limited to) securities issued or guaranteed by the Australian (Federal and State) governments and cash.
|Suggested investment time frame
||Minimum of five years
|Expected frequency of negative annual return
||Three to less than four in 20 years
|Summary risk level
||Medium to high
||$700.6 million (as at 31 January 2020)
|Total fees and costs (%)
* Performance objectives are not promises or predictions of any particular rate of return.
# Size of both accumulation and pension assets.
A bond is a debt security such as a loan to a government, corporation (such as banks) or other borrowers. The loan will generally pay interest and principal back to the bond holder over its term to maturity. The interest rate paid on the loan is generally fixed as a percentage payment or as a percentage over some reference rate, for example the 3 month bank bill rate.
Bond valuations fluctuate on a daily basis. This is because the bond market constantly reassesses interest rates based on factors that include the direction of monetary policy, inflation and borrower credit worthiness.
Bond prices typically have an inverse relationship with interest rates, so lower interest rates means higher bond prices, and vice versa.
Can you get a negative return in the Australian Bond Option?
Yes, it’s possible.
The Australian Bond option predominantly invests in securities issued or guaranteed by the Australian (Federal and State) governments, and cash.
The interest rate paid on these bonds is generally fixed at the time the bond was issued. For example, consider a 10-year bond issued by the Australian government when market interest rates (market yields) were about 3%. The bond would be issued with an annual coupon rate of 3% and, over the 10-year life of the bond, the government is expected to pay a coupon of 1.5% every six months and repay 100% of the principal in 10 years’ time.
The bond market constantly reassesses interest rates based on factors including the direction of monetary policy, inflation and borrower credit worthiness. The current market yields affect the valuation of individual bonds. Bond prices typically have an inverse relationship with interest rates, so higher interest rates means lower bond prices, and vice versa.
If this 10-year government bond was held for three years, such that it now had seven years to maturity, and market interest rates fell from 3% to 2%, the bond price would rise to about 106.5% of the original principal. However, if market interest rates rose from 3% to 4%, the price of the bond would fall to about 94% of the original principal.
This example uses a single bond to illustrate the concept that, under certain circumstances, bond prices can fall and generate negative returns. Of course the UniSuper Australian Bond option invests in many different bonds with various yields, coupons, and maturities. However the same principles apply. While UniSuper is a medium to long-term investor, the Bond option is “marked-to-market” on a daily basis which means each bond is effectively valued according to what the market would actually pay for them if we wanted to sell. This is the only way we can provide a fair outcome to all members in the option, because at any given time some members will be joining the option and others will be redeeming, and we need to process these transactions at a fair market price. However, the downside to ensuring fairness is that the capital value of the option will fluctuate.