Rate cuts highlight appeal of corporate loans
The current low yields offered on bonds and term deposits present an opportunity for SMSF investors to broaden their fixed income allocations to include corporate loans, according to a fund manager.
Metrics Credit Partners managing partner Andrew Lockhart said with an average 23 per cent allocation to cash according to the latest ATO statistics, SMSF investors in particular had suffered during the two recent rate cuts from the Reserve Bank.
“Investors who rely on earning interest from their savings were the biggest losers when the RBA cut rates to a record low in July, prompting banks to slash interest from cash accounts, term deposits and savings accounts.
“To top it off, in bond markets, investors are paying higher prices for declining yields, with Australian government bonds generating less than 2 per cent and corporate bond yields continuing to fall. Overseas, negative rates mean some investors are paying to own bonds.”
He added that by moving “slightly along the risk curve” from term deposits and government bonds, investors could significantly boost their yield by investing in corporate loans.
Mr Lockhart told SMSF Adviser the fund manager had seen considerable interest from SMSF investors in their listed investment trust, the MCP Master Income Trust, since listing on the ASX in 2017.
“We are witnessing very strong demand and raised some $1.6 billion over the past 18 months,” Mr Lockhart said.
“Investors like the diversification of holdings, low complexity of the assets being invested, capital stability of the underlying assets and predictable monthly or quarterly income generated.”
The trust invested in predominantly floating rate loans to Australian corporates, which Mr Lockhart said provided more capital security for investors than equities as a result of corporate insolvency laws.
However, he warned that trustees and their advisers should do their research before formulating an allocation to corporate loans within the fixed income portion of their portfolio.
“It is important that investors don’t think all credit or fixed income assets are the same and there are many differences in risk and returns,” he said.
“The need to choose a competent and diligent manager is a key risk mitigation strategy.”