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Prime Value Asset Management’s Matthew Lemke manages income funds and has worked in global investment markets for more than 30 years. Matthew watches fixed income markets closely, and says diversified income portfolios could provide some relief from relentlessly low interest rates.
“The RBA said coronavirus has cast a shadow over the economy. Well, the incidence of coronavirus in Australia has certainly dissipated in recent weeks but the lingering effect from easing monetary policy to record low interest rates is casting a shadow over investor portfolios, as investors can no longer achieve a decent interest rate on their savings.
“RBA governor Philip Lowe says interest rates could be locked at record lows for years, which means investors are almost forced to find other ways to produce income.”
He said understanding risk tolerance is key for investors during these times, as investors may be tempted to take on more risk than they may otherwise be comfortable with. “Investors are forced to take on more risk to stop going backwards. But they’ve seen so-called safe haven listed investments experience severe volatility during a crisis.
“Investors need to consider alternatives but be mindful about how much risk they wish to take on board.”
Diversified income portfolios are attracting more interest among investors including retail investors, family offices, high net worth investors, charities and trusts. “There is value in diversity, and as we work through COVID-19, diversifying into quality assets is the name of the game.”
Matthew says key to the approach is spreading investments across diverse income producing instruments. “It’s possible to achieve returns of four and five per cent above the RBA cash rate by spreading risk across income securities such as traditional debt securities, mortgage securities, corporate bonds and other income-producing assets.”
There’s no room for speculative income via junk bonds or listed investments, which can be vulnerable to short-term market sentiment.
Risk is further managed by targeting quality securities which offer fixed rates of return instead of floating rates of return, as floating rates will fluctuate over time. “Using this approach provides some insulation from the big market swings, which give listed investments a higher risk profile.
“As we saw in the fastest bear market in history during February 2020, when markets panic there is nowhere to hide.
“Diversified income securities adds steady income to a portfolio without the extreme volatility we see in listed securities.”
The Prime Value Diversified High Income Fund, managed by Mr Lemke, launched in August 2019 and targets a 4% p.a. return net of fees above the RBA cash rate.
The lower risk Prime Value Enhanced Income Fund (previously the Prime Value Cash Plus Fund) has delivered a 2.87% p.a. return net of fees since inception in 2014.
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