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.

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.

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.

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.

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.

Important Information

_{Unless otherwise specified, any information contained in this article is current as at the date of this publication and is provided by Fidante Partners Services Limited ABN 44 119 605 373, AFSL 320505 (Fidante Partners), the responsible entity and issuer of interests in the Bentham Wholesale Syndicated Loan Fund (Fund).  Bentham Asset Management Pty Ltd  ABN 92 140 833 674 AFSL 356199 (Bentham) is the investment manager of the Fund.  The information is intended solely for holders of an Australian Financial Services Licence or other wholesale clients as defined in the Corporations Act 2001 (Cth).  It is intended to be general information only and not financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs.  Each person should, therefore, consider its appropriateness having regard to these matters and the information in the product disclosure statement (PDS)and any additional information brochure (AIB)for the Fund before deciding whether to acquire or continue to hold an interest in the Fund. If you acquire or hold an interest in the Fund, we will receive the fees and other benefits, which are disclosed in the PDS or any AIB.  Neither Fidante Partners nor a Fidante Partners related company and our respective employees receive any specific remuneration for any advice provided to you. However, financial advisers (including some Fidante Partners related companies) may receive fees or commissions if they provide advice to you or arrange for you to invest in the Fund. Bentham, some or all Fidante Partners related companies and directors of those companies may benefit from fees, commissions and other benefits received by another group company. The PDS and any AIB can be obtained from your financial adviser, Fidante Partners Investor Services tem on 13 51 53, or Fidante Partner’s website www.fidante.com.au.}