Current Unit Price: (20 min. delayed price) ASX:MXT $1.67 -4.86%
NAV as at COB: 01.04.20 $2.0013
Current Unit Price: (20 min. delayed price) ASX:MOT $1.51 2.03%
NAV as at COB: 01.04.20 $2.0104

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Portfolios need more downside protection

As global equity markets turn down on increasing concerns about the economic impact of the coronavirus, both investors and their advisers have been recommended to review their portfolios’ downside protection.

Andrew Lockhart, Metrics Managing Partner, said the prolonged bull run in equities and the low interest rate environment had driven many investors into overweight positions in growth assets.

“In the current environment, it is important for advisers and investors to stress test portfolios and ensure adequate downside protection,” he said.

Mr Lockhart noted that investments that are senior in a company’s capital structure and rank ahead of equity, result in less volatility and lower correlation than investments in equity markets.

“When markets begin to rise again, these assets rise from a higher point and obtain greater cumulative benefits from compounding returns,” he said. “Effectively, losing less requires less to bounce back.”

Downside protection is a key feature of Australia’s corporate loan market, which offers capital stability and consistent returns throughout market cycles.

“Regardless of conditions in equity markets, Australian corporates still have to borrow and refinance their loans, and continue to pay interest on current loans,” Mr Lockhart said.

“As such, an investment in defensive asset classes such as corporate loans has historically provided an important source of downside protection in previous downturns.”

Preserving capital does not mean losing income

While preserving capital is key for pre-retirees and retirees, corporate loans can also provide an important source of income, from the interest corporate borrowers pay.

As they are slightly higher up the risk curve than government bonds, corporate loans offer attractive income returns.

“Currently, Australian government bonds are generating around 2%, which is similar to the rate of inflation,” Mr Lockhart said.

“Rather than investing in these assets for effectively no return, by taking on slightly more risk investors can obtain reliable returns of between 4-10% from the direct lending to Australian companies.

“And for those investors who require liquidity, an investment in an ASX-listed fund providing exposure to a diversified corporate loan portfolio can provide daily entry and exit – with income paid monthly.”

Strong local corporate loan assets

Corporate loans are loans made to businesses of scale (ie not SMEs) for a specific purpose, such as working capital, real estate, capital expenditure and acquisitions and returns are generated from the interest they pay.

This subset of fixed income is classified as a defensive investment as it is structured with embedded protections such as floating rates, providing predictable yields and low volatility.

While corporate loss rates are low, averaging 0.32% over the past 10 years, Mr Lockhart said it is important for investors to tap into well-diversified portfolios that effectively spread risk.

“Corporate loan fixed income portfolios with around 150 such loans provide diversification across sectors and loan tenors, and can therefore be a valuable addition to an investor’s fixed income allocation,” he said.

A corporate loan fund can provide exposure across a range of industry segments including energy, industrials, consumer staples, healthcare, IT, utilities, infrastructure and commercial real estate.

“With the recent fall in equities markets and growing uncertainty in global markets, we believe corporate loans warrant a closer look for investors seeking downside protection,” Mr Lockhart concluded.

Advisor Choice – 5 March 2020

Current Unit Price: (20 min. delayed price) ASX:MXT $1.67 -4.86%
NAV as at COB: 01.04.20 $2.0013
Current Unit Price: (20 min. delayed price) ASX:MOT $1.51 2.03%
NAV as at COB: 01.04.20 $2.0104

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All website content in respect of the MCP Master Income Trust ARSN 620 465 090 (the Trust) is issued by The Trust Company (RE Services) Limited ABN 45 003 278 831 AFSL 235 150 (Perpetual) as responsible entity of the Trust and is prepared by Metrics Credit Partners Pty Ltd ABN 27 150 646 996 AFSL 416 146 (Metrics) as the investment manager of the Trust.

The information provided in this website is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs. Before making an investment decision in respect of the Trust, you should consider the current product disclosure statement (PDS) of the Trust and the Trust’s other periodic and continuous disclosure announcements lodged with the ASX, which are available at www.asx.com.au/, and assess whether the Trust is appropriate given your objectives, financial situation or needs. If you require advice that takes into account your personal circumstances, you should consult a licensed or authorised financial adviser.

Neither Perpetual nor Metrics guarantees repayment of capital or any particular rate of return from the Trust. Neither Perpetual nor Metrics gives any representation or warranty as to the currency, reliability, completeness or accuracy of the information contained in this website. All opinions and estimates included in this website constitute judgments of Metrics as at the date of website creation and are subject to change without notice. Past performance is not a reliable indicator of future performance.

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The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned May/2019) referred to in this document is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at http://www.zenithpartners.com.au/RegulatoryGuidelines

Disclaimer and disclosure

All website content in respect of the MCP Income Opportunities Trust ARSN 631 320 628 (the Trust) is issued by The Trust Company (RE Services) Limited ABN 45 003 278 831 AFSL 235 150 (Perpetual) as responsible entity of the Trust and is prepared by Metrics Credit Partners Pty Ltd ABN 27 150 646 996 AFSL 416 146 (Metrics) as the investment manager of the Trust.

The information provided in this website is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs. Before making an investment decision in respect of the Trust, you should consider the current product disclosure statement (PDS) of the Trust, and the Trust’s other periodic and continuous disclosure announcements lodged with the ASX, which are available at www.asx.com.au, and assess whether the Trust is appropriate given your objectives, financial situation or needs. If you require advice that takes into account your personal circumstances, you should consult a licensed or authorised financial adviser.

Neither Perpetual nor Metrics guarantees repayment of capital or any particular rate of return from the Trust. Neither Perpetual nor Metrics gives any representation or warranty as to the currency, reliability, completeness or accuracy of the information contained in this website. All opinions and estimates included in this website constitute judgments of Metrics as at the date of website creation and are subject to change without notice. Past performance is not a reliable indicator of future performance.

Cororate Governance
Personal Trading in Non-Perpetual Securities | RE Services Personal Trading in Non-Perpetual Securities | Unitholders Communications Policy | Continuous Disclosure Policy

The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned May/2019) referred to in this document is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at http://www.zenithpartners.com.au/RegulatoryGuidelines

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