A beginner's guide to fixed interest asset classes
Chris Paton, chief investment officer at La Trobe Financial explains how fixed interest investments work and why they can play a valuable role in every portfolio.
Chances are, you have heard about 'fixed interest' investments but you might not be sure what they involve.
That's not uncommon because while most Australians are familiar with cash, property and shares, many are less familiar with fixed interest.
In fact, Australians have historically been under-weight in fixed interest.
Traditionally, fixed interest investments have been dominated by government or corporate bonds that require large sums of capital, meaning these investments have been limited to institutional investors.
However, there is another type of fixed interest investment - property credit funds - that offer investors low-volatility returns with far more modest capital requirements.
How do property credit funds work?
Credit funds typically work by pooling the capital of a wide range of investors.
The fund then loans this money to borrowers secured by mortgages over property. What you are investing in is not the property, but rather property-backed loans (that is, mortgages).
In this way, property credit funds have a distinct advantage over traditional bonds, offering the potential for far greater diversification.
The returns investors can expect to receive depends on the credit fund and the underlying investment strategy which may differ product by product.
By way of example, across our range of investment options, La Trobe Financial's Classic Notice Account currently has a variable yield of 5.15%*pa. Our flagship 12 Month Term Account has a variable return of 6.65%*pa. Our 4 Year Account has a variable yield of 8.20%* per annum, all net of fees and reviewed monthly.
Ballast for your portfolio
As an asset class, fixed interest is renowned for generating healthy yields with less volatility relative to other asset classes.
All investments carry some level of risk, but the beauty of credit funds is that they can provide ballast to an investment portfolio, helping to keep it steady even when other investment markets are dishing up a wild ride of highs and lows.
These qualities have driven demand for property credit funds, particularly in recent years when we've seen plenty of sharemarket volatility.
Three tips for choosing a credit fund
Investing in any managed fund means placing your trust in the fund manager. So, it pays to look under the hood to really understand what you are investing in.
When it comes to property credit funds, I recommend asking three questions:
1. How diversified is the fund?
Diversification can help to lower risk and smooth out returns. You may come across credit funds that invest in a small number of high value loans. That's not what I regard as diversification because the success of the fund can hinge on a handful of borrowers.
At La Trobe Financial our exposure is spread across almost 12,000 individual loans. The properties that act as loan security are located right around Australia, so our portfolio is geographically diverse.
Around 60% of the secured assets are residential properties, with strategic allocations made to commercial and light industrial properties. This gives our credit funds diversification across sectors.
2. How transparent is the fund?
For me, transparency is a primary issue. It all boils down to trust because if I'm going to invest in a fund it is only fair I should know how my money will be invested.
Any investor, or indeed any interested member of the public, can check out La Trobe Financial's monthly Fund Investment Snapshot, where we share over 1,000 data points covering portfolio allocations, diversification and performance.
I believe this gives La Trobe Financial the highest level of transparency in the market.
Sure, you may not want to check the numbers. But it's reassuring to know they're available at any time and we are open to having them interrogated and challenged.
3. What does the fund's long-term track record look like?
In the world of investing, experience accounts for a lot. No two years are the same. No two economic cycles are identical.
So, you want to be confident that a credit fund manager has the experience to handle the challenges of a low interest rate environment - as well as today's high rate/high inflation world. That depth of experience only comes with time.
La Trobe Financial has been managing credit for seven decades providing comfort for investors in times of volatility, and demonstrating careful management at all points of the economic cycle.
We have navigated a global financial crisis, a global pandemic, a low rate environment, and a rising rate/high inflationary environment. Throughout all of those periods, we have delivered impeccable performance for our portfolio account investors.
We are now over a year into the most recent cycle - an aggressive rate hiking cycle - and our portfolios remain in great shape. This reflects La Trobe's experience constructing and managing our portfolios to perform across all economic and market cycles.
The bottom line
While every investor has different aims and goals, credit funds can bring income and diversification to a portfolio while smoothing out overall volatility.
It's a trifecta many investors are seeking at present. Add a fund manager with experience to the mix, and credit funds can be a simple way to fold fixed interest investments into your portfolio.
*Rate of return current at 1 Dec 2023. Consider the PDS and TMDs from issuer La Trobe Financial Management Limited AFSL 222213 before investing.You can find the PDS and TMDs on our website latrobefinancial.com.au. Credit Fund investment is not a bank deposit and returns are not guaranteed. Financial product advice in this article is general only and does not consider your personal circumstances.
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