Fixed Income

Fixed income structure risks need focus

Investor understanding of fixed income risks around structure types requires more attention and education, according to Metrics Credit Partners (MCP).

“One of the big concerns we have around individual, small-ticket investors buying retail bonds is do they fully understand the nature of the risk that they’re taking through the information that’s disclosed to them,” MCP managing partner Andrew Lockhart said at a recent Sydney media briefing.

“Do they understand the price?

“Is it like the institutional bond market where it’s fragmented investors chasing a lot of yield?”

Lockhart highlighted when it came to fixed income structures, he believed it was far better for investors to pool and aggregate capital so they can participate on a size and scale where their capital is valued.

“For example, if I’m an investor and I have $50,000 to invest and lend, the person borrowing the money from me probably doesn’t think too much of $50,000, but if it was $50 million and they want that capital, they’ll negotiate terms and conditions and you’ll extract pricing that represents the value of your capital,” he noted.

“What we’re trying to do is have investors understand the benefits of aggregating capital in small amounts into a larger pool that can be invested in size and scale in a way commensurate with the way in which a bank operates.

“So when we lend $30 million or $40 million or $50 million, we have skin in the game and a seat at the table to negotiate terms and conditions with those banks or borrowers.”

He said having the means to negotiate an outcome that protected investors from risk is key for fixed income investing.

“You only need to look at past experiences of retail investors who invested in retail bonds in New Zealand and Singapore – for some of those companies, their credit quality deteriorated and investors lost money,” he warned.

“Often if investors have put a few thousand dollars into a retail bond and the issuer deteriorates, you’ll see a price that’s quoted on the market, there’ll be no liquidity in that market, there’ll be no buyers, and investors have no real access to information to understand what’s going on.”

Earlier this month, MCP opened an initial public offering for its Master Income Trust with SMSF investors in mind as it distributes monthly dividends and has low capital volatility.

The listed investment trust provides direct exposure to Australia’s corporate loan market, which historically has been dominated by banks and therefore difficult for non-bank investors to access.

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