Plunging interest rates highlight growing need for new interest income opportunities

From

Andrew Lockhart

Investors can find attractive and consistent income – as well as protect their capital – by gaining exposure to the alternative fixed income and private debt asset class, according to Australia’s leading non-bank corporate lender, Metrics Credit Partners (Metrics).

“Obtaining consistent income in today’s record low interest rate environment is a challenge for investors,” said Andrew Lockhart,  Metrics’ Managing Partner.

“Investors who rely on earning interest from their savings were the biggest losers when the Reserve Bank of Australia (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% and corporate bond yields continuing to fall. Overseas, negative rates mean some investors are paying to own bonds.”

In its latest SMSF quarterly review (March 2019), the Australian Taxation Office reported that SMSFs, on average, held almost a quarter (23%) of their assets in cash and term deposits whilst just 1.5% had exposure to debt markets. Further, the ATO estimates that in 2018, there was approximately $170 billion dollars held in cash in SMSFs[1].

Mr Lockhart said that SMSFs and other retail investors who weren’t shopping around for competitive rates and looking beyond traditional assets were missing out on generating the best fixed income returns possible in a low interest rate environment.

“By moving just slightly along the risk curve from bank term deposits and government bonds, investors can obtain reliable returns between 4 -10% a year from the corporate loan market,” he said

In terms of their returns, Mr Lockhart said corporate loans have a low correlation to other major asset classes including equities, government bonds, hybrids and term deposits, providing an excellent source of portfolio diversification for investors.

Until recently, a key issue for many investors has been accessing the corporate loan market, which has traditionally been dominated by the big four banks.

To address this issue, Metrics Credit Partners was the first corporate loan lender in Australia to list an investment trust (LIT) on the ASX in 2017, providing investors with access to a diversified portfolio of corporate loans, via the MCP Master Income Trust (ASX: MXT). The fund provides diversification to in excess of over 100 corporate loans across industries and spanning the full credit spectrum.

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