Speaking to InvestorDaily, Middletons Securities head and portfolio manager David Middleton said combining an indexed bond with an indexed annuity is chiefly a cash flow investment.
“You can pick up an indexed bond at the moment that has a running yield of just under four per cent with indexation at the capital and at the income stream,” Mr Middleton said, adding that the strategy is protected against inflation and potential interest rate hikes.
“You are sort of trading in the increase in the capital value for a little bit of a higher income along the way because indexed bonds go up in value and the indexed annuity – because it is a principle and interest payment – comes down, so you can put them together and leverage up the running yield you’re getting to a little over five per cent.
“With that you are actually getting a higher running yield now with inflation protection,” he said, adding that a rise in inflation will likely provide capital growth.
"It’s just a matter of being aware of the fact the opportunity cost of protecting against inflation is just about zero at the moment.
“If that’s the case, it makes it almost a no-brainer. People just aren’t aware of it.”
The strategy also prevents investors falling into the trap of “pretty ugly fixed interest markets” if there is an inflation hit, Mr Middleton said.
“And it’s not costing you anything – that’s the beauty of it all.”
