Fixed Income, Investments

Corporate debt offers fixed income solution

corporate loan market

SMSF investors should consider allocations to the corporate loan market to enjoy better returns than those generated by cash or government bonds.

SMSF investors looking for greater returns than those from cash or government bonds should consider the corporate loan market, which is returning up to 10 per cent a year, according to a non-bank corporate lender.

Metrics Credit Partners managing partner Andrew Lockhart said the corporate loan market was not open to retail investors, but Metrics had formed a listed investment trust – the MCP Master Income Trust – for this segment of the market.

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

Lockhart pointed out corporate loans had a low correlation to other major asset classes, including shares, government bonds, hybrids and term deposits, and provided a source of portfolio diversification for SMSF trustees.

He highlighted that, according to the March 2019 quarterly review of SMSFs conducted by the ATO, 23 per cent of assets were held in cash and term deposits compared to 1.5 per cent exposure to the debt market.

“Investors who rely on earning interest from their savings were the biggest losers when the Reserve Bank of Australia cut rates to a record low in July, prompting banks to slash interest from cash accounts, term deposits and savings accounts,” he said.

“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.”

SMSFs that did not look beyond traditional assets were missing out on generating better fixed income returns in the current low interest rate environment, he said, adding the firm’s listed investment trust had been operating since 2017 and provided diversification through exposure to corporate loans spread across a range of industries and business sectors.

“Today’s modern corporate debt funds mean investors are not exposed to just one corporate as they would be through traditional corporate bonds, but rather have a diversified portfolio that has over 100 corporates and is listed on the ASX, making it much more liquid,” he said.


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