“This has remained true while term deposit rates declined from mid-2012 through 2013 as the Reserve Bank of Australia decreased its target cash rate and banks digested the muted near-term economic outlook,” Morningstar research analyst Kathryn Young said.
“It would be easy to assume fixed interest trusts’ income returns should be higher than term deposits’ in that environment, but it wouldn’t necessarily be correct,” she said.
In her December report, Fixed Interest: Checking up on Income, Ms Young said that the median income return for Australian bonds was two percentage points higher than what is available for most one-year term deposits.
“Of course, a median figure masks the variation of results across strategies, and this category exhibits more variation than might be expected,” said Ms Young.
“Over time, the range between the highest and lowest outcome is about four to eight per cent,” she said.
“The top end of that range declined over 2013 as the tailwind provided by bond yield and credit spread declines in 2011 and 2012 diminished.”
Ms Young noted that lower cash rates seemed to have minimal impact on some of the funds they should affect the most.
“Perennial Tactical Income 17406, which structurally pursues much lower interest rate risk than most strategies in this category, maintained a healthy income return in 2013,” she said.
“These unit trusts should offer a higher income return than term deposits now and in the future because they take on risks that the latter doesn’t, and investors must be paid for those risks.”
