Investors seek alternatives in volatile times

20 February 2018: By Andrew Lockhart

The recent nosedive in global stock markets, wiping billions off the value of investments overnight, once again highlights the risks for investors who are overexposed to local and international share markets. The hardest hit are usually retirees or investors close to retirement, who have less time to recoup their losses. These investors often reallocate to less volatile assets such as cash or term deposits, but this can mean lower returns and reduced cash flow.

The latest dive was driven by a rise in US interest rates, a tightening in the US job market and the potential for rising inflation. The flow-on effect of the adjustment to bond and wholesale debt prices saw sharp volatility in equities.

Australians are heavily exposed to share market volatility. According to the 2017 ASX Australian Investor Study, 37% of Australian adults have direct investments in shares. An even larger proportion of Australians are indirectly exposed to shares through their superannuation funds.

Diversification, which can lessen the risk for investors, is poorly understood, with 40% of those surveyed by the ASX saying they did not have diversified portfolios and 15% unsure whether they were diversified or not.

Corporate loans an alternative for investors
A large part of the problem is there are few choices for SMSF investors wanting to diversify. Fixed interest investment is largely restricted to government bond, semi-government bonds or bank term deposits, with virtually no access to corporate bonds.

Less risky alternatives to equities that still offer attractive returns are difficult to access. This has resulted in an over allocation to cash and hybrid securities, particularly for SMSFs and retirees.

Australian domestic super fund investors and self-managed super funds are overweight in equities, overweight in cash and they have no means to access asset classes that offer lower risk than equities but with higher returns than cash without the durational risk associated with traditional fixed interest.

At MCP, we aim to change that. We’re no strangers to fighting for the small player, having made our mark in the corporate loan sector, an area dominated by the big banks. A good example of this is the launch of our MCP Master Income Trust (ASX: MXT), which allows investors to invest in corporate loans – an asset class dominated by regulated banks.

The trust’s 2017 IPO, worth in excess of $500 million, was one of the largest on the ASX last year. Strong participation in the capital raising saw it fully subscribed in a matter of weeks.

Set up to lend funds to corporate borrowers across a wide range of industries and transaction types, including infrastructure, property development and corporate acquisitions, MXT offers an alternative to investors seeking lower risk than equities but with attractive returns. The roughly 8,000 investors in MXT also come from diverse backgrounds, and include SMSFs, retirees, retail clients and high net worth individuals.

A major advantage for retail investors is that they can readily buy units in MXT via the ASX and can sell their investments whenever they want, given the liquid secondary market. Importantly, it also gives them broad diversification usually only available to large wholesale investors.

Diversification and liquidity benefits
Through MCP’s market innovation, MXT – which is the first ASX-listed corporate loan trust in Australia – gives investors access to the private debt market in a liquid format. Investors also benefit from lower transaction costs and don’t have to put their money away for 90 days like they would with a term deposit to even earn the RBA cash rate.

MXT targets returns of the RBA cash rate plus 3.25% p.a., currently 4.75% after fees, and distributes income to unitholders each month.

With MCP being a leading non-bank corporate lender, we are reliant on our strong client relationships and ability to turn transactions around quickly. We have a strong credit skill set and are commercially focused on seeking opportunities for our investors. This puts us in a very strong position when talking to borrowers.

By pooling funds from the trust and our wholesale funds, we’re also in a position to lend to corporates. This allows us to value our capital properly, charge the right fees and credit margins, and negotiate the right terms and conditions to mitigate risk.

The biggest risk for anyone investing in corporate loans is the risk of credit loss. As we say to our MXT investors, we will focus on ensuring they won’t have concentrated exposure to any one single company. It means they get a well-diversified spread of exposures and that we’ve sought to lower the credit risk for them.

This strategy has paid off. Over the almost five years since we launched our first fund to wholesale investors, we have not sustained a credit loss or had a negative month for our investors.

In addition, our investors require us to build very strong relationships with our borrowers because if we don’t, we won’t get the right opportunities to invest and generate returns for them.

The approach we take is very much a bottom-up, hands-on risk analysis. We look at a company’s management, its capital structure and how competitive it is within its industry. Fundamentally, we want to lend to a company that offers products and services that are valued by its customers and, as a result, has a sustainable business model.

Bringing these benefits to investors is the driving force of the new trust.

Our main priority is providing our investors with a liquid investment in a scalable platform that allows them to get the benefits of a fee structure available to wholesale investors. And, most importantly, we aim to offer attractive net after-cost income consistent returns and a compelling alternative to the volatility of equities.