The traditional model of using a mix of shares and bonds to minimize risk in a portfolio has broken down due to long term low interest rates and investors should be looking at alternative sources for fixed income returns within the wider bond universe, according to a boutique investment manager.
Tanarra Credit Partners managing director Graham Lees said the Australian investment market differed from those overseas in that fixed income investments were often overlooked in favour of shares, property and cash and this investor behaviour has created problems.
“This focus means that people also overlook the volatility that occurs in those markets and now fixed income is back in focus for many people,” Lees told smstrusteenews.
“However, the traditional 60/40 portfolio mix of shares and bonds has broken down due to the low rates of recent years and bonds became correlated with shares instead of being uncorrelated.”
Tanarra Credit Partners managing partner Peter Szekely suggested as a result of this correlation investors would be well served by considering the growing private credit market, which provides bond style investments originated or negotiated outside public markets.
“In an SMSF portfolio, private credit is a good fixed income alternative as it is based on quality investments with fixed distributions. It is also different from a standard bond as it has lower liquidity but safer than shares and bonds because it offers credit risk,” Szekely explained.
“We call them a ‘sleep at night instrument’ because the returns are based on the bank bill swap bid rate (BBSY), which means returns to investors move in line with the base rate.”
He added the firm’s TCP Private Debt Income Fund aims to provide a cash net return of the BBSY plus 5 to 6 per cent per annum and, with base rates at 3.6 per cent, this equated to a target net cash yield to investors of around 9 per cent annually.
Lees acknowledged private credit was an asset class unfamiliar with SMSF investors but was rapidly growing in the Asia Pacific region and the size of the market was currently around $US 75 billion.
“It is in its infancy here but we expect it to take off as investors want to be in markets with good assets and Australia fits that bill and has an active private equity base which is now opening up to retail investors,” he said.
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