Debt Investments – to float or not to float?

Written by Henry Elgood, Portfolio Manager – Trilogy Enhanced Cash

Investment options with a focus on predictable and steady income are usually appropriate for investors with a lower risk profile. These types of investments can range from a number of months, such as term deposits, to longer tenured government debt. An example of this was a $2.75 billion USD-denominated debt issuance with a maturity debt, or capital repayment date, 100 years from June 2017.

Globally, investors have been seeking investments offering an attractive and competitive yield. Each country’s central bank has their respective monetary policy targets which determine their short term borrowing rate. This rate, known in Australia as the cash rate, is the overnight money market interest rate and is used as the benchmark when pricing debt instruments. It is this overnight interest rate that drives benchmark rates, such as the bank bill swap rate (BBSW), which are then used to price Australia dollar securities, derivatives and bonds. One of these types of securities is a floating rate note. Several types of debt instruments include corporate bonds, government bonds and debentures. The largest issuers in the Australian debt market are domestic and international institutions which offer investment types such as fixed rate note bonds, floating rate note bonds and inflation linked bonds.

The price of new and existing debt instruments is determined after a number of factors, including the prevailing overnight interest rate, are considered. These types of instruments are known as floating rate notes. A floating rate note, or floating rate bond, is a bond that offers a fixed yield above a certain rate or benchmark. This benchmark, such as the bank bill swap rate (BBSW), is a variable benchmark so any movement in the BBSW will affect the total yield on the debt instrument. These debt instruments are usually repriced at the prevailing BBSW rate on a three month or six month basis, known commonly as the reset date.

Does the risk profile differ between types of bonds?

Bonds have traditionally offered a less risky investment option than other investments such as equities. However, floating rate notes and fixed rate notes each have their place within a balanced portfolio.

Fixed rate bonds will offer a stable and secure income stream on a regular basis whose yield will not be impacted by the variable market rate. Floating rate notes, meanwhile, have a reset period that adjusts the underlying benchmark at the point in time of reset occurring. There are a number of factors to consider outside of market benchmarks in assessing whether bonds, be they fixed or floating, form part of your investment portfolio.

Prior to making any investment decision, it is important to speak to your financial adviser before considering these options in light of your risk tolerance.

How does Trilogy incorporate floating rate notes into our Funds?

Trilogy Enhanced Cash is an unlisted managed fund which has approximately 70% allocation to cash and cash-style investments including term deposits, unlisted managed funds and short-term debt instruments while the remainder is invested in the Trilogy Monthly Income Trust. The Trilogy Monthly Income Trust is a pooled mortgage investment scheme which allows investors to access returns through loans secured by first mortgages on Australian property.

Within each of Trilogy Enhanced Cash and Trilogy Monthly Income Trust, Trilogy has engaged FIIG Securities, under the terms of an investment mandate, to manage a portfolio of short-term debt investments. FIIG is Australia’s leading fixed income specialist with over $8 billion currently under investment, providing investors with direct access to bond markets and a range of term deposits and other cash solutions.

To discuss more, contact one of our Investor Relations specialists, while you can read more on the value of diversifying your investment portfolio and how you could achieve this with a split tactics strategy.

This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 as responsible entity for the managed investment schemes mentioned in this article. Trilogy has issued a Product Disclosure Statement (PDS) for each of the managed investment schemes mentioned within this article. The PDSs are available at or by contacting us. You should obtain a copy of the relevant PDS, understand the risks, and seek personal advice from a licensed Financial Adviser before investing. Investment in the Trust is subject to terms and conditions, and risks which are disclosed in the PDS. These risks include the risk of losing income or principal invested. Applications will only be accepted on the current application form that accompanies the PDS. These managed investment schemes are not bank deposits and Trilogy does not guarantee their performance.

The information on this website contains general information and does not take into account your personal objectives, financial situation or needs. We recommend you consult a licensed financial adviser. Trilogy is only licensed to provide general financial product advice on its own products and does not consider your objectives, financial situation or needs when providing any information or advice.

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