Can credit replace lost dividends in a zero-rate world?

November 16, 2020
Can credit replace lost dividends in a zero-rate world?

For Credit Portfolio Manager Phil Strano, as we near the end of 2020 it’s become clear that not all debt or equity is created equally. So where do the greatest opportunities lie in debt markets? 

As 2020 comes to a close, investors of all kinds are faced with what seems to be a once-in-a-lifetime dilemma; how to generate an income in a zero-rate world.

Despite clear evidence that investing in stocks solely for their income has generally detracted from, rather than added to, long-term returns, the nature of the Australian retirement system is that income remains a borderline obsession with investors and advisers alike. Rather than focusing on the all-too-often-referenced need to seek “total returns” or the fact that the very nature of superannuation requires all of us to withdraw more as we age, this piece will consider an alternative to those long-lost dividends.

If it wasn’t abundantly clear already, it should be now: the days of portfolios averaging 6 percent per year in income are gone, whether we like it or not. The Reserve Bank of Australia’s recent decision to cut the cash rate to 0.1% (and the suggestion that it would remain there for at least the next three years) means we now live in a zero-interest rate world. As we stand today, the leading five-year term deposit offers a yield of just 1.0% per annum. Similarly, following the National Australia Bank’s (ASX: NAB) financial report this week, its dividend has now fallen to just 4.4% per year, including franking.

Now faced with the conundrum of falling income from the two most popular traditional sources, it’s clear we need to start thinking differently. The first question that every investor should ask is, “What is the smart money –that is, the institutions, billionaires and pension funds – doing about it?” The answer – in the case of income, they have turned to credit.

Put simply, credit is bonds or loans made to companies of all kinds. Credit differs slightly from traditional fixed interest investments like government bonds or term deposits, as the loans are not explicitly guaranteed, rather they are secured by the assets of the borrower. Probably one of the leading specialists in Australian credit markets, both private and public, is Phil Strano of Yarra Capital. Phil has enjoyed an extensive career in the industry, most recently leading the Credit team at Victorian Funds Management Corporation, the asset management arm of the Victorian Government.

Read more at The Inside Adviser