Can you get a good return by committing to simplicity?
Simple may be best when it comes to investing, according to La Trobe Financial chief investment officer Chris Paton.
Every day of our adult lives we are called on to make complex decisions. Many of them revolve around money.
The sheer complexity of all this decision-making can be exhausting.
So, when it comes to investing, there is a lot to be said for low-maintenance, hands-free investments that help us reach our financial goals.
Add in 'easy to understand', and it's fair to say these 'simple' investments hold plenty of appeal.
Yet as investors, we often have a bias towards complexity.
It's easy to assume that complicated structures must be superior to simple ones -and deliver higher returns.
But this is not always the case.
Complex investments can bring increased risk. And higher fees.
The more 'moving parts' an investment has, the more can go wrong - and, most importantly, the harder it is to understand what your true risk position really is.
On the other hand, the simpler an investment is, the easier it is to understand what can go right, and what can go wrong. And the lower the cost tends to be.
With this in mind, let's take a closer look to see if investors can earn healthy returns just by committing to simplicity.
How does the 'simplicity premium' work?
When it comes to investing, the 'simplicity premium' is all about sticking to straightforward, low-cost, and easy-to-understand investments.
As a guide to simplicity, let's look at the private credit market, which is essentially all about non-bank lending.
On one side, non-bank lenders pool investors' money, typically via a managed fund structure.
This capital is then used to provide loans to borrowers - it may be a family buying a home, a business expanding, or a developer completing a project.
On the flipside, investors can receive regular income generated by interest on the underlying loans.
And, if they choose the right manager, they can be confident their capital is being put to good use and may also enjoy low volatility.
People love to overcomplicate things, but in essence, this is what private credit is all about.
If you've ever taken out a loan, you already have a sense of how private credit works.
So, does this simplicity pay a premium?
Yes, simplicity can pay a premium.
An example is La Trobe Financial's award-winning^ 12 Month Investment Account.
This fund is big - really big - with over $11 billion in funds under management.
It is underpinned by a granular portfolio of over 12,000 loans, so there is tremendous depth and breadth of borrowers (great for diversification, which lowers risk).
It's a classic example of how simplicity doesn't have to mean compromising on strong returns.
The simplicity premium goes beyond financial gains
Of course, the concept of simplicity also relates to understanding what you want from your investments - be it regular income, low volatility, capital growth, or a mix of all three.
Either way, the simplicity premium can extend well beyond financial returns.
Investors who understand how their money is being put to work - and, by extension, what could go wrong - are better placed to feel relaxed about their portfolio. For example, bank hybrids were widely misunderstood, particularly in relation to where they ranked in the capital structure. In reality, they were complex instruments that did not perform predictably during periods of stress.
Put simply, investors who understand exactly how an investment works tend to sleep more easily at night, rather than stressing over their portfolio.
Simplicity isn't always equal
Within any asset class there are grades of simplicity.
Not all private credit funds for example, are created equal, and not all underlying assets are the same.
At La Trobe Financial, we focus on quality assets, disciplined borrower selection, and careful portfolio construction - all wrapped in skilled management.
The bottom line is that we take a far from simple approach to managing our investment opportunities.
But by doing the hard work behind the scenes, our investors can enjoy a simple investment that delivers premium returns.
Explore how La Trobe Financial's income strategies are designed to support dependable monthly income. Call the La Trobe Financial team on 1800 818 818 or visit latrobefinancial.com.au.
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 Australian Financial Services Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important that you consider the Product Disclosure Statement (PDS) before deciding whether to invest or continue to invest in any of the funds. The PDSs and Target Market Determinations are available on La Trobe Financial's website.
When considering whether to invest or continue investing in the La Trobe Australian Credit Fund, you should be aware that (1) an investment in the Credit Fund is not a term deposit, and your investment is not covered by the Australian Government's deposit guarantee scheme. Investing in the Credit 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 Credit Fund. The key risks of investing in the Credit Fund are explained in section 9 of the PDS, available on our website.
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