Demographic trends and aligning portfolios

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Investing, like other areas of life, can be subject to trends. But there is no escaping demographics. This is something investors need to plan for.

Seasoned investors will know that asset markets can be subject to here-today-gone-tomorrow trends (anyone remember the virtual real estate craze?).

However, one of the inescapable trends facing many developed economies is population ageing.

sponsored demographic trends and aligning portfolios

The fact is, we are living longer. Much longer.

This has real ramifications for how we invest, who we entrust our money to, and how we plan for our retirements.

What demographic ageing means for investors

History buffs will know the Age Pension was introduced in 1908 based on the recommendations of a Royal Commission.

It may seem crazy to us today that it would take a Royal Commission to bring about income support for retirees. But the sticking point at the time was the cost of the pension.

The irony is that back in 1908 only 4% of the population lived past age 65.

It's a very different picture today.

Fast forward to 2024, and many of us will live well into our 80s or 90s. More and more of us will pass the century milestone.

While a long life is something to be celebrated, the reality is that a far greater number of people are receiving an Age Pension that was envisaged back in 1908.

Australia has 4.2 million retirees. Over half these people (54%) rely on the Age Pension as a source of income.

This raises questions about sustainability.

Between 2000 and 2019, the cost of the Age Pension grew by 92% in real (after inflation) terms, from $24 billion to $46 billion.

Already, we have recently seen the age at which the Age Pension can be claimed rise from 65 to 67.

It's not unreasonable to expect further fine-tuning in the years to come as government budgets become strained under the weight of an ageing population and never-ending demands for infrastructure, defence, health and energy transition.

Demographic change has critical implications for investors

With stretched government coffers, we cannot assume the Age Pension will be the financial backbone of a dignified retirement.

This will test investment portfolios. Low volatility investments, uncorrelated to shares, will become of greater importance as our population ages.

For today's investors approaching retirement, the need to plan for a dignified retirement that may span well beyond 20 years past retirement age is very real.

It's not just about finding investments offering healthy returns coupled with low volatility. Part of the challenge is finding a provider with experience spanning the entire economic cycle.

Private credit: Healthy returns, low volatility

Fortunately, a new range of 'alternative' assets is becoming available for retail investors.

Traditionally, an investment portfolio comprised cash, bonds, and probably a handful of carefully selected stocks. There has been a lack of focus on alternative investments, other than perhaps owning an investment property (and yes, a rental property is technically classed as an 'alternative' asset).

But things are changing. And fast.

Around the world, fewer companies are listing on stock exchanges. In Europe, the Middle East, India and Asia, there are 40% fewer publicly listed companies now than in 2002.

It's not that there are fewer quality companies. Rather, quality companies are increasingly looking to private markets for funding.

This is creating opportunities for retail investors who can access these markets through asset classes such as 'private credit'.

Private credit boils down to the provision of credit to individuals, companies and even governments by private investment institutions.

La Trobe Financial has been managing private credit since 1952. Our La Trobe Australian Credit Fund provides investment opportunities into portfolios of Australian real estate credit private credit, giving investors monthly income generated by highly diversified portfolios of first registered mortgage-secured loans.

Our experience has been that a disciplined credit process targeting a diversified portfolio of residential and commercial loans, with a low loan to value ratio, produces low volatility returns through all parts of the economic cycle.

Now, we are actively looking to broaden our product set. There are some wonderful international private credit opportunities that can add valuable diversification to investors' portfolios.

US private credit is now the largest sub-sector of private assets globally. And it can be a very compelling investment.

Since 2005, private credit loans to US middle market companies have provided an average total return of about 9.4% annually. Middle market companies are big companies, with strong cash flows and experienced management. These companies, too, are increasingly turning to private markets to raise funds, and investors can be the beneficiaries of this thematic.

The view of the major US asset forecasters is that the coming 10 years are likely to see private credit as a clear out-performer, with expected returns disproportionately above other asset classes relative to the expected volatility.

Put simply, private credit - done right - is forecast to generate higher returns for lower risk. This is exactly what many retirees are looking for.

Now's the time to invest in experience

As we look towards living longer, La Trobe Financial has a focus on longer term investing that generates low volatility income well into a long retirement.

Even better, we help our investors avoid the ups and downs of sharemarkets, with a track record in the asset class that spans multiple economic cycles.

We bring this breadth of experience to our new options exploring US private credit.

Disclaimers: La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321 and the La Trobe US Private Credit Fund ARSN 677 174 382. Financial product advice in this article is general only and does not consider your personal circumstances. Past performance is not a reliable indicator of future performance. Consider the Product Disclosure Statement (PDS) and Target Market Determinations before investing at La Trobe Financial's website latrobefinancial.com.au. The PDS for the La Trobe US Private Credit Fund will be available on or around June 6, 2024.

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Chris Paton is chief investment officer at La Trobe Financial. He has more than 14 years' experience in banking, asset management and financial services and has held a number of senior roles since joining the business in 2017. Prior to joining La Trobe Financial, Chris worked in law specialising in the banking and finance sector. He holds Bachelors in Commerce (Distinction) and Law (Hons).