In association with Harbour Asset Management.
Fixed interest markets are not what we knew 10 years ago. Today’s markets are regulated and managers can now pick from a wider range of investments, which is good news for the everyday investor, explains Harbour Asset Management's Mark Brown.
Dial back a decade and savings were predominantly channelled into term deposits and precarious finance companies. Today, the broader range of low risk investments available has given managers opportunities to innovate, says Harbour Asset Management’s Mark Brown.
“Term deposit rates have come right down to 3% or less, which creates a challenge for ordinary Kiwis who need income,” says Brown.
As a result, managers such as Harbour have launched new-style diversified income funds where investors can receive more in their hand than they could from a term deposit, with a fraction of the risk of the finance companies of old.
Managers do this by building funds with a wider range of investments than cash, bonds and shares that made up older-style balanced funds. “The industry is broadening its investment choices and stepping into what was the banks’ territory, which enables us to replace a percentage of the equities with innovative fixed interest investments,” says Brown.
Those new investments include overseas issued bonds from solid New Zealand companies. Spark, for example, may issue a bond in British pounds or Fonterra in Chinese renminbi. Because these companies aren’t household names overseas, they pay a higher return, boosting investors’ returns often by half a percentage point. The currency is hedged back to New Zealand dollars to avoid uncertainty.
Managers such as Harbour also eye bonds issued by medium sized enterprises, which offer decent returns for investors.
Another investment class now included in income funds is mortgage and asset-backed securities, which are made up of thousands of New Zealand and Australian mortgages and loans packaged into one pool. Brown says fund managers are comfortable with this style of investment because Australasian banks and lenders are cautious about who they lend to and are well regulated.
“Our view is that where we can do due diligence on the Australasian finance providers to ensure lending standards are sound, we can be comfortable with these investments,” says Brown. Each investment makes up a very small portion of investors’ funds.
Modern income funds have a lower exposure to shares than was common in the past with income investments. This brings comfort to conservative investors.
Choosing the mix of investments to build an investment fund is a balancing act. Typically the higher the credit ratings investments have, the lower the return. Managers such as Harbour offset suitable higher earning investments against more traditional ones to increase overall returns within the context of safety first.
Doing this yourself isn’t always a good idea, because private investors typically put too many high risk eggs in one basket, says Brown. With analysts choosing the range of investments, the risks are significantly reduced.
There is a lot of noise in the media about fees, but the reality is that active management to ensure that the best investments are chosen and non-performers weeded out does cost a little more. Nonetheless, investors in Harbour’s income fund should get a distribution of around 5%, each year before the fees are paid.
Investors should always seek to understand their own risk appetite and investment objectives to identify suitable investments for their personal situation. Brown concludes: “We think that engaging a financial adviser is a useful way to work through this process.”
For more information, go to Harbour Asset Management.