This asset produces a safe, predicatable, and low risk source of income, but is often overlooked by advisers constructing portfolios for their clients.
It’s clear that as increasing numbers of Australians approach retirement, income has an increased prominence for most investors. However, the current extremes of asset allocation that have long become the norm amongst retail investors and their advisers could in fact be creating sub-optimal portfolios that leave investors worse off in retirement, according to a recent paper by Bentham Asset Management.
In the paper, Asset Allocation: Credit lost in the middle, Bentham highlights poor asset allocation strategy in the wake of the GFC as a commonality in current portfolios; specifically large weightings to low-risk cash and fixed interest at one end of the spectrum and equities at the other.
In other words, many financial advisers have for too long ignored the middle ground, which has left a gaping hole of investment options. Bentham managing director Richard Quin said that, while credit investments typically provide higher income than cash and significantly less risk than equities, the asset class was often overlooked by the retail market – particularly income-hungry SMSFs.
He explained that the answer to more successful portfolio allocations may lie not at risk extremes but in the overlooked intermediate class of credit investments:
"For retail investors and the increasing pool of SMSFs, credit is an intermediate investment class that plays a very positive role in portfolio diversification. With investors shying away from the volatility of equity markets, credit provides a predictable and regular income stream with minimal capital volatility."
The report concludes that short-duration credit is poised to come into its own “as a safer and more predictable source of income – and one with less risk than equity thereby protecting capital,” adding that “it is a pity it tends to be lost in the middle”.
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