Rethinking Retirement Income in an Evolving Market
An Interview with Bentham CIO Richard Quin
Fixed income and credit can strengthen retirement portfolios by providing stable income, preserving capital, and offering inflation protection. In this Q&A, Bentham Asset Management CIO Richard Quin discusses why the current market conditions favour this asset class.
Question 1: Why should retirees be considering fixed income?
Richard: Right now, interest rates are sitting at levels that not only beat the target inflation rate but also offer genuine returns for investors. In other words, the basic yields you’re getting from bonds are pretty solid, strong enough that most of the time, you’ll be earning more from them than you would from equities.
On top of the base rate, credit investments give you an extra yield boost. You have plenty of options here, you can stick with safer credit spreads, choosing higher rated instruments for a more cautious approach, or, if you’re after a bit more excitement (and risk), there’s always high-yield or hybrid securities that offer the potential for higher returns.
One of the big advantages of fixed income is that it tends to have less drawdown risk compared to shares. That’s because bonds sit higher up in the pecking order (or capital structure) if things go south, which means your capital is better protected. Capital preservation is a key consideration for retirees looking to play it safer as they shift their portfolios into more defensive territory.
We don’t see interest rates dropping back to those rock-bottom levels we’ve seen before, but if they did, and if shares took a hit, fixed interest can step up and provide protection to portfolios.
Question 2: What are the advantages of investing in credit on public markets versus private credit?
Richard: One of the benefits of investing in credit on public markets is you always know exactly what your investment’s worth, and you have access to your money when you need it. There has been plenty of discourse regarding credit funds not updating the value of their holdings regularly, but at Bentham, all our portfolios are marked to market daily, so you can enter or redeem from them easily.
It’s easy to talk about locking your money away for a while, but it’s a different story if you suddenly want to pull out and can’t do it without incurring a significant loss. With public market credit, you’ve got the flexibility to move your cash around more freely. On the other hand, private debt assets—even when listed—often start trading below their true value if the market turns south.
Our portfolios are valued daily, which means you have more flexibility and you always have the option to buy or redeem. This flexibility and transparency is why I believe public fixed income can be a smart choice for retirees.
Question 3: How can fixed interest be used in a retiree’s portfolio?
Richard: Right now, with interest rates sitting rather high, retirees have a solid foundation in fixed income. You’re not just getting a decent base rate, there’s also the option to pick how much credit risk you’re comfortable with, so you can shape your portfolio to suit your needs.
One of the real strengths of credit markets is the flexibility to stack different types of credit together, each with its own risk level, which lets you dial your income up or down. The returns from these investments are usually steady and paid out monthly or quarterly, so it is a reliable way to keep cash or income coming in.
Given where interest rates are at the moment, it’s a strong case for retirees to think about bumping up their allocation to fixed interest. It’s all about making your money work smarter and keeping your retirement income steady.
Question 4: What are some of the potential risks, and how can they be managed?
Richard: Every asset class carries some risk, and fixed income’s no exception. The good news is, if you’re proactive and keep a close eye on things (what we call active management) you can steer clear of several of the trouble spots.
One of the big risks out there is having all your eggs in one basket. Take hybrid bonds (or AT1 capital instruments) for example, they were all the rage with everyday investors using share brokers here in Australia. But the catch is, hybrids aren’t your typical fixed interest investment. They’re basically a way for banks to raise capital, so if a bank hits a rough patch, those hybrids can take a hit, which is why the regulators started nudging retail investors away from them.
To make matters trickier, a lot of investors who bought hybrids also owned a lot of bank shares, so if the sector begins to suffer, investors can be hit twice as hard. This is why you often hear investors talking about diversification and spreading out risk. With a Bentham fund, you have access to a broad mix of securities and risks, which helps keep things portfolios balanced.
Question 5: What could a modern retirement portfolio look like?
Richard: Look, fifty years ago, the “gold standard” for retirement was a simple 60/40 split between fixed interest and equities. However, we have so many more tools and instruments at our disposal now that sticking to that investors aren’t forced to stick to that formula anymore.
These days, your portfolio doesn’t have to be a “cookie cutter” template. It comes down to two non-negotiables: how much capital you’re sitting on and how much risk you can actually stomach.
Once you’ve nailed those down, you can reverse-engineer your ideal income. If you’re playing it safe, you can layer different funds and assets to build a reliable income floor.
The reality is that if your capital is limited, your margin for error is slim. You can’t afford a massive hit to your principal, so you’ll likely lean heavier into fixed interest and pull back on equities. It’s all about protecting what you’ve got while making it work for you.
Important Information
The publication is intended to be general information only and not financial product advice.
This material has been prepared by Bentham Asset Management Pty Limited ABN 92 140 833 674 AFSL 356199 (Bentham), the investment manager of Bentham Global Income Fund NZD, Bentham Syndicated Loan Fund NZD, Bentham Asset Backed Securities Fund, Bentham Global Income Fund, Bentham Professional Global Income Fund, Bentham Syndicated Loan Fund, Bentham Professional Syndicated Loan Fund, Bentham Defensive Income Fund and Bentham High Yield Fund (Funds). Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 | Fidante Partners Services Limited ABN 44 119 605 373 AFSL 320505 (Fidante) is a member of the Challenger Limited group of companies (Challenger Group) and is the responsible entity of the Fund(s). Other than information which is identified as sourced from Fidante in relation to the Fund(s), Fidante is not responsible for the information in this material, including any statements of opinion.
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