From the editor

By Tony Featherstone, editor

The sharemarket rally in the past six months has been accompanied by stories about the so-called "Great Rotation" as investors worldwide sell cash and low-yielding bonds and buy shares. However, extreme shifts in tactical asset allocation - that is, large increases or decreases in portfolio asset weightings - are usually the preserve of professional investors rather than retail investors.

Jumping between asset classes to chase higher short-term returns overlooks the importance of capital stability for small investors, especially those nearing or in retirement. Returns on government bonds, for example, may look low compared to high-yielding bank and telecommunications stocks, but such bonds play an important role for long-term investors seeking well-diversified, lower-risk portfolios.

Evans & Partners' Mike Saba leads this issue with an overview of Exchange-Traded Australian Government Bonds (AGBs), which will trade on the Australian Securities Exchange this year. For the first time, an investor will be able to buy and sell AGBs just as they can BHP Billiton or Commonwealth Bank shares, in an important development for investors.

As Mike says: "The yield on a government bond may look low in isolation (compared to other assets), but a key factor is the consistency of return and the offsetting of other risks. Looking at overall returns from holding government bonds since 2000 paints a picture of steady returns. Some of these returns have been driven by the steady decline in interest rates over this period … Government bonds offer competitive returns, especially when their protective nature is taken into account."

Vanguard's Robin Bowerman continues the bond theme in this issue with an analysis of the features, benefits and risks of bond exchange-traded funds (ETFs). The listing of bond ETFs on ASX make it possible for investors to access all the main asset classes via low-cost ETFs, which aim to replicate the price and yield of an underlying index.

Robin argues that including bonds in portfolios helps reduce overall return volatility, something that plagued many investors during and after the GFC. "A major objective of many investors moving into their retirement years is to ensure their portfolio is set up to generate an income stream," he says. "It is tempting to look to high-yielding shares to provide this component and overlook fixed income, whereas a more robust approach is to have a balance of both."

ASX's Head of Education, Tony Hunter, complements the bond theme with an overview of ASX online resources to help investors learn about the features, benefits and risks of ASX-listed bonds. The free ASX online interest rate securities course is a great place to start. Tony says: "Just as low-risk instruments with reliable yields can be regarded as the stumps of your investment house, education can be the foundation for implementing your investment strategy."

Still on the income theme, this month's issue also features stories on dividend yield investing by Wealth Within's Dale Gillham and Clime's John Abernethy. UBS's Peter Mermelas makes his ASX Investor Update debut with an excellent piece on using instalment warrants to capitalise on company dividend payments.

As always, talk to your financial adviser or do further research of your own before acting on themes in this issue.