James specialises in the theory and best practice of portfolio construction and management. His success within national and international investment banks led him to become a Co-Founder of Steward Wealth and he is a regular columnist for the Australian Financial Review.
In the wake of the GFC, it is common to see Australian investors with their assets allocated between two extremes, with large weightings to low risk cash and fixed interest at one end, and to equities at the other, leaving a rather large gap in the middle. This is unfortunate, because there is an income-producing asset that sits comfortably in that gap. This is The Missing Asset Class. So, what are Australian investors missing out on?
A brief examination of the facts shows that this asset could be suited to investors seeking to increase income and reduce volatility. Perhaps this is a good time to reveal exactly what ‘it’ is.
A brief glance at the graph below shows that Australians have notably larger allocations to equities and cash/deposits than comparable nations. This is due in large part to a local country investment bias towards the Australian sharemarket. As the baby boomers move from the wealth accumulation phase of their lives to drawing down on that wealth to provide income in retirement, they may need to consider income-generating investments that pose less risk to their capital. Global credit markets are potentially an attractive option in this context.
What’s so good about credit?
Seniority
Credit investors have priority of payment above equity investors. A creditor generally has a legal right to be paid before anyone else, including shareholders. Furthermore, creditors are entitled to take legal action to recover their investment.in the event of a default (such things happen, and are planned for), creditors generally rank ahead of suppliers and others in the queue for payment (note that the unfortunate shareholders rank last in a situation like this).
Security
In addition to seniority, some credit instruments also provide investors with the benefit of security over specific assets of the borrower. This normally takes the form of a mortgage over property and/or other realisable assets.
Global liquidity
The global credit market is large and deep. For example, the US corporate bond market alone is worth US$4.5 trillion* (that’s trillion with a ‘t’). The size of the market, the number and size of issuers, the number and size of investors, and the wide variety of credit products can help an active manager to access liquidity, even in difficult times.
Yield
Credit markets typically offer higher income than equities and government bonds, with historically lower volatility than equities.
Diversification
Credit issuers come from many industry sectors in many regions of the world, creating more credit opportunities globally than locally. Global credit markets give active managers and investors the opportunity to achieve a high level of diversification – an important factor for credit portfolios
Credit Types
There are many types of credit instruments, enabling an active manager with a global perspective to construct a portfolio of diversified investments. Credit sectors include:
Investment grade bonds
Securitised debt
Global syndicated loans
Convertible bonds
High yield bonds
Capital securities
Hybrid securities
If you are interested in discussing how to add some credit exposure to your portfolio please get in touch with Steward Wealth on 03 9975 7070 or email info@stewardwealth.com.au
Source: Bentham Asset Management December 2013
This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product. You should also obtain a copy of and consider the Product Disclosure Statement before making any decision on a financial product. You should seek advice from Steward Wealth who can consider if the general advice is right for you.
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