Hunting for yield in an era of low-interest rates

Record low-interest rates are leading investors to seek out new opportunities to gain a decent return on their money. Higher returns always mean a greater level of risk, but if a company is promoting returns that are significantly higher than bank term deposits, proceed with care.

Looking after your capital.

When it comes to investments, it's fair to say that some risks are greater than others. And that can include investing your money in a financial product often described as a term investment. Sometimes marketed as an attractive alternative to bank term deposits, term investments don't offer the same protection. Something that investors in the IPO Wealth Fund and Mayfair 101's Dunk Island development have recently discovered to their detriment. 

If you decide to invest in unlicensed investment schemes such as Dunk Island, it's important to be aware that you're at greater risk of losing your capital if things go wrong.  

Protection mechanisms

True term deposits are issued by banks with an Australian licence, and they're backed by the Australian Government Guarantee of $250,000 per account-holder (or person), per authorised bank. Generally, products that claim they're better than term deposits or better than cash aren't scrutinised or policed before being released on the market. 

That said, ASIC, the corporate watchdog, does monitor unlicensed investment schemes, but it's only when alarm bells start ringing that a full investigation will take place. Steps are often taken to try to reclaim investor capital, but many investors will lose every cent.

The perils of a low-interest-rate environment

In a low-inflation, low-interest rate climate, it's more important than ever to exercise caution with your investments. With defensive assets – also known as income assets - it's better to focus on the return of your capital rather than the return on your capital. Some defensive investments provide higher returns with an acceptable level of risk. But there will always be riskier investments available with the lure of higher returns.  

Managing expectations

Defensive assets aim to provide an investor with income rather than capital growth. Assets such as these generally have a lower investment risk but offer stable returns in the short term. Therefore, if a small amount of value can be added above the term deposit rate, that should be seen as a good outcome. 

Higher returns should ideally be pursued through growth assets when risks are known and accepted. However, with the Reserve Bank predicting that interest rates are likely to remain low until at least 2024, you may need to consider lowering your expectations. Depending on your personal situation, it may be better to settle for lower returns than opting for riskier investments.

We invest with care

At Clearwater, we're always diligent when it comes to the companies we invest in and how much we allocate to their products. We've never invested in companies such as IPO Wealth Fund or Mayfair 101, despite the promise of higher returns. We make it our mission to carry out rigorous research and analysis before deciding to access investments that claim they'll add value above the current rate of a term deposit.

Understanding risk.

On top of meticulous research, we always balance the combination of investments we use. This is an approach that has served us well. We've never had an investment suffer a permanent loss of capital. What's more, this performance has been achieved while exceeding our return target of the cash rate plus four per cent per year since we started the portfolio back in 2013. 

The Clearwater Dynamic Portfolio does take on higher risk. However, when we select defensive assets, our initial focus will always be on the level of risk before determining whether it will add a reasonable level of value to your investment.

by Gary Lucas.