Oran Hall | Shifting around bond investments
Published:Sunday | April 12, 2020 | 12:17 AM
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: I would like to know if I can transfer a bond investment from one financial institution to another, that is, remove the bond investment without selling it.
– Ainsworth
FINANCIAL ADVISER: You can move a bond investment from one financial institution to another without selling it. Yours is an interesting question and shows how dispensing with physical certificates has changed the trading and transfer of securities.
There was a time when investors received physical certificates for their stocks and bonds. So much is now done electronically, investors are not required to have a physical certificate in their hands. The market has also changed as so many Jamaicans now buy global bonds, and that has made custody and transfer of securities a little more complicated.
Corporate investors and high net worth individuals have it easier than small retail investors, the primary reason being that global bonds tend to trade in large amounts. It is possible they could have their own direct accounts in which to hold their securities, but small investors are not so fortunate. Their holdings of bonds are usually held as a part of a larger block held by the investment dealer, who themselves are generally only able to buy the large blocks in which the instruments trade on the international market.
The holdings of the bond holders are held in electronic form, but they can move them from one investment dealer to another by giving one broker signed instructions to transfer custody – not the ownership – of the bond to another investment dealer. Upon receipt of your instructions, the dealer will contact the other dealer and both will do what is required to effect the transfer.
This will not affect your right to receive interest nor to sell should you decide to do so, but it could be challenging to sell if the amount is small as it is generally difficult to find buyers for small amounts. In some cases, the dealers may choose to purchase the securities for their own account, but they may choose to combine the orders of several bond holders in order to sell to a big buyer.
Global bonds are generally good for a portfolio as they add diversity to it. If they are of good quality, they can improve the quality of the portfolio by reducing its risk. It is possible that they could enhance the yield, although careful attention should be paid to the yields as a high rate of interest could be an indication that the quality is not of the highest standard; the more risky instruments tend to pay higher interest to compensate for the higher risk.
Global bonds can be useful to an investor who has commitments denominated in foreign currency as they are able to provide a stream of foreign currency income to meet some or all of those commitments.
They also provide protection against the depreciation of the value of the local currency. In such a case, the conversion of the interest to local currency yields more local currency. Further, the value of the principal also increases when it is converted to local currency at maturity if the investor chooses to convert.
These benefits notwithstanding, investors should be careful to match their portfolios to their objectives, not weighting their portfolios too heavily to bonds if their primary objective is the increase in the value of their capital, or not weighting it against bonds if their primary objective is income.
The benefits that can be derived from investing in global bonds can be eroded by bonds of a poor quality. It seems that your bonds are sovereign bonds, meaning bonds issued by a government. These tend to be of a higher quality than corporate bonds but still carry some risk. Country risk should be considered when contemplating investing in global bonds.
One other disadvantage, particularly for small investors, is limited liquidity, considering that it may be challenging to sell if it becomes necessary to do so before the bonds mature. Such an action could also be disadvantageous if interest rates increase above the coupon rate in the event of it becoming necessary for you to sell before the maturity date as this would cause the price of bonds with a fixed rate of interest to fall.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.