Company debts can earn you serious money

MAKING money from other people’s debt is getting easier as a new wave of defensive investment options opens up to pre-retirees and others looking to diversify their wealth.

In a debt market traditionally dominated by government bond funds and big banks’ hybrid shares — both which have risky elements that many people don’t realise — corporate bonds are becoming a serious option for investors.

They are essentially loans to businesses and pay a higher rate than term deposits. While there is always the risk of a company failing to pay its debts, good products spread investors’ money over many loans.

Australians invest less money in fixed interest products than overseas investors, and Metrics Credit Partners managing partner Andrew Lockhart said this was partly because Australia did not have a deep and liquid corporate bond market.

“Most investors have limited opportunities to invest into corporate fixed income,” he said.

“Term deposits are certainly safe and secure but they do not generate much of a return.”

MCP is aiming to raise up to $500 million from investors for its new MCP Master Income Trust, a listed investment trust that diversifies money across corporate loans and has a target investment return of 3.5 per cent above the Reserve Bank’s cash rate. Investors’ money will go into

MCP’s wholesale income fund, which has grown from

$75 million to

$2.2 billion in four years, and be spread across at least 50 different loans.

Hybrid shares — which combine properties of bonds and shares — have been popular with mum and dad investors but have recently been criticised by ASIC. “People see hybrids as like a fixed interest security but they’re much more volatile and expose investors to equity-like risk,” Mr Lockhart said. Governm ent bond funds did well when interest rates dropped sharply during the Global Financial Crisis, but if rates start rising sharply their investment returns could slide into reverse.

FIIG Securities director of research and education Elizabeth Moran said Australian corporate bonds were becoming more popular.

“Until recently, corporate bonds have only been available in $500,000 parcels, making them historically less accessible,” she said.

“However, investors can now access corporate bonds from $10,000 per bond, which has seen the asset feature more heavily in investment portfolios.”

Ms Moran said exchange traded funds were beginning to appear in the market as a lowcost way to replicate a bond index and allow investors to diversify.

“Australians have a love affair with equities and property. However, in a balanced portfolio, it’s crucial to have an allocation to fixed income for its defensive qualities and known returns,” she said.

“Unlike shares, bonds are legal obligations and companies cannot cut interest. However, they can cut dividends on shares and stop distributions on hybrids.

“Throughout the economic cycle corporate bonds earn 1-2 per cent per annum more than term deposits but are still considered low risk.”