06

February

One should take extreme care. Never. Buy. Investments from an Advertisement!

Good quality investments “fly off the shelves” well before you will ever hear of them.  Investments that advertise in expensive print and TV media are to be treated with the utmost caution. Investments promoted on social media are even worse and should be avoided like the plague! 

Warning Buyer Beware – get good advice!

Fixed interest investments are safe… aren’t they?  Not necessarily! Some are, some are not. Working out which ones are which is what professional advisers mainly get paid to do. Investors need to understand the risks they are taking in order to gain the extra fixed interest returns. This is not easy.  The fixed interest (loans) market is huge, ten times the size of the stock market. There is a huge range of assets to choose from many of which are quite difficult to understand. Investment in this field is highly specialised.

Retail investors, in my experience are very wary. They have learnt the hard way to be like this. They will only invest in bank deposits, end of story! Fine, I say, it’s your money, see you later! These hard lessons have come to them from the awful losses that they, or people close to them, have experienced firsthand!  Nothing I can say will convince them otherwise.

Why is this? Well it’s actually easier than you think for intelligent people to be fooled by something that “looks secure and well-backed”  especially when it is strongly marketed (in flashy TV & newspapers ads) Assets in this category, in my 35 years of experience, are highly dangerous and should not be touched under any circumstances!  Do you remember “Teachers Credit Society?”  full-page ads … TV …! It failed in 1990 and investors would have lost 100% of their deposits but for Burke government coming to the rescue with WA’s hard-earned tax dollars!  

1st Mortgages (that were supposed to be as safe as houses ) offered by venerable companies like Countrywide, Blackburne & Dixon and Graeme Grubb failed spectacularly in the mid 90’s and gave rise the Gunning Enquiry in 2000! I lived through this era and guided my clients away from this hazard at the time, but it was tough going because many of 65 year old (and older) wealthy clients had been told on their wealthy and no doubt very sensible father’s knee, “son/lassie! go for property in the river suburbs and invest the rest into 1st mortgages on quality (Perth) property” or words to that effect. Great advice in 1965 or 1975 but not so good in 1990! so it took many hours of discussion and argument on how the 1st mortgage market had changed (for the worst) in the last 40 years, to convince these Applecross and Peppermint Grove residents to part with their mortgages and use some of the cash to buy Wesfarmers Co-op shares (a convertible corporate loan) that paid a fixed 10% fully franked dividend until the company, one day in the (unspecified) future, may, swap them at face value for ordinary shares in Wesfarmers Limited . Unfortunately, many people then, as now, only took their dad’s advice (which probably included “stay away from Financial Advisers”) and stuck with their 1st mortgages to the bitter end!  They probably tell their children “only invest in Commonwealth Bank deposits son or, better still, spend it all so you don’t have to worry about losing it like I did”.

In Conclusion:

There are many positives for credit focused LIT’s, managed by experienced professionals.  Listed credit funds with a well-constructed, well-managed portfolio of private corporate loans confer many key advantages over bank hybrids, unlisted debentures, mortgages and in fact most other forms of “retail” high yield interest bearing investments.

When you add this to the fact that the credit focused LITs will likely have a low correlation with both shares and the public market debt and are listed and therefore easy to buy and sell with few trading costs, they make an excellent addition to a modern portfolio.

Building and maintaining a smart portfolio is hard work, it takes skill, teamwork, patience and perseverance. Fund managers must have an intimate knowledge of the field, a laser like focus on the risks and be respected by the companies that they lend to. If your LIT fund manager has these attributes you are well on the way to a successful outcome.

It’s also a case of trusting your advisor, Helm, to do the work needed to choose the funds in each category (asset class) of your portfolio and to carefully and patiently build a diversified portfolio of these quality assets that suit your needs.

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