Lonsec releases 2010 Alternative Income Sector Review


Lonsec has released its 2010 Australian Alternative Income Sector Review, which consisted of 21 funds encompassing Alternative Income and Alternative Income (High). Of these, two Alternative Income funds received a Highly Recommended rating, the CFS Global Credit Income Fund and the Macquarie Income Opportunities Fund. No Alternative Income (High) funds received Lonsec’s highest rating.

Libby Newman, Senior Investment Analyst, “While there are broad general characteristics common to each group, no two funds are alike, even within the same category,” said Newman.

“This makes an ‘apples for apples’ comparison virtually impossible, even within sub-sectors.”

Unlike Traditional Income sector products which are typically managed with reference to a widely accepted fixed interest market benchmark, such as the UBS Composite Bond Index, Alternative Income sector products tend to be managed with the aim of generating returns that exceed ‘cash’ (or a cash proxy such as the UBS Bank Bill Index) by an arbitrary return – in other words, absolute return in nature. Collectively, they may potentially invest in a much wider set of assets.

Products in the Alternative Income (High) sector are expected to exhibit and maintain exposures to securities that are either specialised and/or have a higher degree of credit risk. “Alternative Income (High) products are generally expected to exhibit a higher level of volatility and therefore are not for all investors,” observed Newman.

Bank deposits – the new black?

“The introduction of the Commonwealth Government guarantee in October 2008 skewed the risk reward landscape offering investors access to almost risk free returns from banks covered by the guarantee” said Newman.

The Government also offered banks and State Government issuers the use of a Government Guarantee to access wholesale funding in the capital markets (which is what many of the Alternative Funds invest in). The guarantee on wholesale debt issuance ceased in March 2010, though many of the securities issued under the program can now be found in various Alternative Income and Australian Fixed Interest funds.

“Essentially, this – coupled with relatively high term deposit rates – has resulted in investors depositing with the banks directly rather than in a diversified fund structure,” said Newman.

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