Regular income and low volatility: Private credit in SMSFs
Private credit can tick plenty of boxes for self-managed super funds, especially in the drawdown phase. Chris Paton, chief investment officer of La Trobe Financial, explains why.
More than 1.2 million Australians manage their retirement savings through a self-managed super fund (SMSF).
It's easy to see the appeal of SMSFs.
Managing our own retirement savings can be both personally and financially rewarding. However, it's not without challenges, and these can become most apparent in the drawdown phase.
At that point, SMSFs need to achieve a critical goal: providing members with regular, reliable income while still generating above-inflation returns.
Private credit funds have the potential to achieve these goals - and more - for SMSF members who are ready to hang up their work boots.
The value of private credit in the drawdown phase
'Private credit' refers to loans provided by non-bank lenders.
Rather than investing through public markets, investors gain exposure to portfolios of privately negotiated loans that offer competitive, inflation-responsive returns.
For retirees and SMSFs looking for consistent cash flow, private credit may be an option to consider, offering a range of potential benefits:
Regular income
Private credit funds typically distribute regular income funded by interest payments made by borrowers.
As a guide, La Trobe Financial's multi-award winning 12 Month Investment Account pays distributions monthly, generating reliable income that can complement other sources of retirement income for SMSF members.*
Unlike savings accounts, which may offer relatively modest returns, private credit funds can provide enhanced income potential.
This can help retirees enjoy a quality lifestyle without the need to heavily draw on capital.
Reduced market volatility
Unlike listed shares that can experience significant market fluctuations, private credit investments tend to trade with much lower volatility.
For SMSF members concerned about market downturns impacting retirement savings, private credit can provide a degree of stability within a diversified portfolio, and help smooth overall portfolio performance during periods of market instability.
Diversification benefits
Australia's 660,000-plus SMSFs focus heavily on two types of investments.
Australian shares make up 27% of total estimated SMSF assets, with cash and term deposits accounting for 16% of overall investments.
Together, these two asset classes alone account for almost half (43%) SMSF assets.
By adding private credit to SMSF portfolios, trustees can improve portfolio diversification, which is central to lowering risk and smoothing out long-term returns.
Protection against rising interest rates
La Trobe Financial's loans are structured with floating interest rates that can increase when market rates rise.
For retirees concerned about inflation and shifting interest rates, this feature can be very appealing.
Income distributions can adjust in line with market rates, which helps to maintain purchasing power over time.
A focus on capital preservation
Capital preservation tends to be deeply important for SMSF members in retirement, and rightly so, as there can be limited opportunities to replace capital lost to market downswings.
The La Trobe Financial team understands this, and our 12 Month Investment Account has a proud track record of 100% return on capital for investors since inception.**
This hasn't happened by chance.
The La Trobe Financial 12 Month Investment Account is backed by a diversified portfolio of loans to high-quality borrowers, secured by registered first mortgages over real property in Australia.
What to look for in private credit
As the number of private credit funds available to SMSFs increases, trustees need to choose a provider with care, looking for strong credit assessment processes, conservative lending practices, transparency, and experience spanning the full economic cycle.
With a 70-year history in the Australian market, La Trobe Financial brings this depth of experience to our investors.
Long story short, by partnering with a skilled provider, SMSFs can use private credit to help members enjoy confidence in retirement with a diversified portfolio supported by regular income, above-inflation returns, and protection against rising interest rates.
Disclaimer: La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 Australian Credit Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321 (Fund). It is important that you consider the Product Disclosure Statement (PDS) when deciding whether to invest or continue to invest in the Fund. The PDS and Target Market Determinations are available on our website. Any financial product advice is general only and has been prepared without considering your objectives, financial situation or needs. You should, before investing or continuing to invest in the Fund, consider the appropriateness of the advice having regard to your objectives, financial situation or needs and consider the PDS for the Fund.
When considering whether to invest or continue investing in the Fund, you should be aware that (1) an investment in the Fund is not a term deposit, and your investment is not covered by the Australian Government's deposit guarantee scheme. Investing in the Fund has a higher level of risk compared to investing in a term deposit issued by a bank and (2) there are other risks associated with an investment in the Fund. The key risks of investing in the Fund are explained in section 9 of the PDS, available on our website. *To view our awards please visit the Awards and Ratings page on our website. ** Past performance is not a reliable indicator of future performance.
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