November 11, 2020

Guide to moving beyond cash and bonds

In the last few weeks, the major banks have continued to cut saving rates down from already record low levels.

Meanwhile, even neo banks Judo and Volt have also cut deposit rates. Judo’s one-year term deposit rate has dropped from 1.41 to 1.23 per cent, while Volt cut its high interest online savings account rate by 0.2 per cent to 1.25 per cent.

Although these online-only banks are still well out in front of the major banks, it goes to show just how fast the market is moving.

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 — indeed, 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.

For those investors who have already looked at bonds and find they need a wider range of products, there are two other areas which should help Australian investors looking for higher yield.

Residential mortgage-backed securities offer high returns compared to similarly rated bonds, in part as compensation for illiquidity, although they do trade.

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. Its one-year return was 2.28 per cent and five years 4.28 per cent.

Increasingly onerous bank regulations have left gaps in the finance market and a number of companies have emerged 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 per cent variable rate, reviewed monthly.

There are also companies that operate in commercial, industrial, office and retail property, including Wingate, Qualitas and MaxCap. Some offer 8-10 per cent per annum but they are illiquid assets.

Elizabeth Moran is editorial director at Fixed Income News Australia.