How rising rates change the investment landscape

As interest rates ratchet up, Shelby Clark, executive director at GPS Investments, believes private credit will continue to hold appeal for investors - especially when experience becomes part of the mix.

For many of us, higher interest rates chiefly mean higher home loan repayments. But the impact will extend a lot further, providing both opportunities and challenges for investors.

Let's take a look at five key ways rising rates are likely to reshape the investment landscape.

1. Returns on cash rise but there will be strings attached

On the face of it, higher rates can make savings accounts more attractive.

There is a catch though.

A large number of savings accounts impose strict conditions around deposits and withdrawals before 'bonus' interest is paid.

We know from a review by the Australian Competition and Consumer Commission (ACCC) that consumers often find it hard to meet these conditions.

In fact, the ACCC found that in any given month, over seven in ten bonus interest accounts didn't pay bonus interest.

A more certain return is available through private credit - essentially non-bank lending.

GPS Investments, for example, typically pays 1-2% more than cash deposits.

As a guide, our Arkus Fund pays a return of 6.50% with zero fees. And you get the same flexibility to invest on a regular basis as a savings account, with the option to make monthly withdrawals.

The added upside of a private credit fund is that you don't see your savings every time you bank online, which can reduce the temptation to dip into the funds.

2. Regular distributions are likely to make private credit even more attractive

As part of the 'fixed interest' class of investments, private credit funds can be a source of regular income, often with distributions paid monthly.

Right now, passive income can be especially valuable.

Australians are battling high living costs and skyrocketing fuel prices, yet the past year has seen wages growth of just 3.4% - below the rate of inflation of 3.7%.

It's not just about income. As the name suggests, private credit funds do not trade on public markets. This means there is none of the volatility we've seen on sharemarkets over the past year - volatility that can leave investors exhausted, and their portfolios worse for wear.

3. Investors may take unnecessary risks

As we all grapple with the cost-of-living crunch, it can be very tempting to look for investments promising elevated returns.

It pays to remember though that high returns always go hand-in-hand with increased risk.

In the private credit market, for instance, some funds are advertising returns of 10%-plus. Make no mistake, this sort of return can come with far higher risk than investors may realise.

These funds tend to have high loan to value ratios, with extremely low buffers if anything goes wrong. The underlying loans are often secured by second registered mortgages, which rank behind first mortgages in terms of repayment priority if a default occurs.

By contrast, at GPS, we always maintain lending buffers of at least 30%, and our loans are secured by first registered mortgages - the highest level of security, which lowers risk for our investors.

4. Experience will shine through

Whether it is listed companies, share funds or private credit funds, the next few months will test newcomers to the market simply because these asset providers lack experience across a range of economic conditions.

In the private credit market, a significant number of new funds have launched in recent months, often by providers with worryingly little experience.

This lack of experience means not every private credit fund will emerge from the current economic climate unscathed.

GPS Investments has been funding new homes in the south east Queensland growth corridor for over 30 years. This depth of experience backed by our conservative approach, and in-depth knowledge of the market we serve, saw us successfully navigate the global financial crisis as well as the COVID pandemic.

That experience will stand us - and our investors - in good stead as we forge a path through the current period of high rates.

5. Diversification is even more important

Diversification has long been seen as a cornerstone of successful investing. It reduces volatility, lowers risk, and helps achieve more consistent returns.

Diversifying is especially important as a risk management strategy when rates are rising as it helps soften the impact of stock market volatility.

Yet fewer than one in two Australians believe they have a diversified portfolio.

Now could be the time to add fixed interest investments such as private credit, to your portfolio.

It can give you the benefit of regular income and above-inflation returns. And options like the Arkus Fund, which charges zero fees, makes investors' money work even harder at a time when every dollar counts.

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