Yields on investments are still declining.
In the last few weeks, neo banks Judo and Volt have cut deposit rates. Judo’s one year term deposit rate has dropped from 1.41 to 1.23 per cent, still well out in front of the major banks, but it goes to show just how fast the market is moving. In the same period, Volt cut its high interest online savings account rate by 0.2 percent to 1.25 per cent.
One consistent, high earning account is Rabobank’s high interest online saver, still offering an attractive 2 per cent for four months, but this is a variable rate.
There is a lot of cash looking for a home and simply, the banks don’t want it. Yields are likely to drop further and we are fast approaching zero. Higher yields mean higher risk but having too much in deposits or putting cash under the mattress means going backwards.
Here are three suggestions to help you start looking for higher yield.
Deposits and bonds are both fixed income investments. They both have maturity dates and a commitment to pay interest on known dates. So, bonds are the next rung up on the risk spectrum and will suit investors looking to replicate an income.
If your portfolio is largely cash, you may be able to double your income and still invest in a low risk fund.
There are more options that ever before to invest in this market. Fixed Income News Australia lists around 30 ETFs and more than 130 funds. There is a very wide range of options for you to target exactly what you want. I would suggest you use the credit ratings of the underlying securities to give you an idea of risk, although you’ll also need to consider sector and geographic location of the companies, term to maturity of the bonds and the sub sectors included in the portfolio.
While performance is important, especially over the longer term, look for ‘running yield’ the expected income over the coming year and ‘yield to maturity’ the expected return if you hold all the investments in the fund until maturity. Some of these figures are getting low! Equally, a number of funds are still showing 4 per cent plus yields, although these are high risk funds. If you are interested in any fund, please read the prospectus and understand the risks involved.
A few possibilities include – Macquarie Australian Fixed Interest Fund which had a one year return of 3.61 per cent to 30 September 2020 and 4.70 per cent over five years. The fund has a 69 per cent allocation to government bonds and 28 per cent to corporate bonds and holds 3 per cent cash.
Aberdeen Standard Global Corporate Bond Fund which invests in international corporate bonds and has a 15 per cent allocation to non investment grade and non rated bonds and returned 4.31 per cent over the last year and 5.59 per cent over the last five years.
[Also read: Residential Mortgage Backed Securities – The Basics]
PIMCO Global Bond Fund which has a mix of government and corporate bonds. This fund has over half of its portfolio in AAA rated securities and a small 6.5 per cent in sub investment grade bonds. One year return was 4.43 per cent and over five years 5.14 per cent.
There is a wide number of bonds available in the over the counter market, where you need a bond broker to transact and, in most cases, need to qualify as a wholesale investor. Rather than invest in a fund, you can invest in select securities to compliment your existing investments.
Bond Income offers ‘six pack’ portfolios. Yields on individual bonds range from around 2 per cent for a Verizon Communication fixed rate bond maturing in June 2030 to around 4 per cent for a Brisbane Airport bond also fixed rate, maturing in 2030. The highest yielding bond on the list is about 4.5 per cent for a floating rate Genworth Financial Mtge bond that has a call date in March 2025 and final maturity in 2030.
Residential Mortgage Backed Securities
Residential Mortgage Backed Securities offer high returns compared to similarly rated bonds, in part as compensation for illiquidity, although they do trade. Simply, mortgages are pooled together, then split into risk and return tranches. Low risk investors choose high rated tranches and get paid first but receive low returns, they are supported by junior tranches that have to lose their entire investment before they lose any funds if the mortgage pool incurs losses. There are other protections that make RMBS low risk investments such as home owner’s equity and lender’s mortgage insurance. RMBS are worth investigating if you don’t need liquidity.
Generally, investors need to find a bond broker to transact these investments but FirstMac has an RMBS fund High Livez that gives access to the securities. It’s one year return was 2.28 per cent and five years 4.28 per cent.
Increasing bank regulation has left gaps in the financing market and there has been a number of companies emerge to offer private debt.
One of the biggest and best known is LaTrobe Financial. It offers a range of investment products. The company provides excellent information about its loan customers, arrears and performance. It also operated through the GFC and boasts that clients did not lose any money through that period. It has a one year product paying a 4.5% variable rate, reviewed monthly.
There are also companies that operate in commercial, industrial, office and retail property. Some of the bigger operators are Wingate, Qualitas and MaxCap Group. I’ve seen some single deals offering 8-10 per cent per annum. But be warned, these are illiquid assets. If you don’t need liquidity and are a high net worth investor, they may be of interest.
Note: The investments mentioned in this article are for educational purposes only and are not recommendations.
Elizabeth Moran is Editorial Director at Fixed Income News Australia
An abbreviated version of this article appeared in The Australian on November 3rd, 2020.