Q+A: What’s really under the hood of your investments?
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Welcome to Fear and Greed Q&A, where we ask and answer questions about business investing, economics, politics, and more. I'm Sean Aylmer. Over the past few years, Australian investors have poured billions of dollars into things like private credit and income strategies. But as rates have risen and global credit markets have come under pressure, some investors are perhaps panic selling. suggesting they may not quite know the true value of the underlying asset of the investments they hold. My guest today is Michael Friesen, Head of Fixed Income at Real Asset Management, RAM, Real Asset Management.
What is the significance of understanding fixed income investments?
RAM works with Blue Chip Communication, which is a great supporter of this podcast. Michael has spent more than two decades in fixed income and says the key to investing now is to know what assets underpin investment. what you're holding remember this is general information only and you should always seek advice tailored to your circumstances before making investment decisions michael welcome to fear and greed q a well thank you sean it's great to be here with you to discuss this So for many of us investing in fixed income, that term fixed income, it's kind of this black box. But I think what we need from you, what I'm wondering from you is really a 101 on the importance of understanding what you're actually investing in, what the underlying asset is.
Yeah, thanks, Sean. It's a very broad question because it is a very broad asset class. I'll try to demystify it for you. Effectively, when you're investing fixed income, you're lending money to someone. If it's a bond, it's just literally you're lending money to that company. If it's a loan, you're lending money to an individual or a company and they promise to pay you back in accordance with the terms of that loan. So at its simplest, it's the investors giving their capital to someone with the hope that they get it paid back and get paid the promised income stream. So within fixed income, there's a very broad range of different types of fixed income.
How do rising interest rates affect private credit investments?
There's obviously fixed rate, fixed income, which promises to pay you a fixed rate of return, or there's floating rate, fixed income, which goes up and down with movements in the cash rate. But the two key risks investors face in all fixed income is either interest rate risk or credit risk. The other key difference is there's public market credit exposure, which are things like bonds, which trade in the over-the-counter market or on the Australian Stock Exchange. Or there is private market fixed income, which is a growing asset class market.
That's actually a very clear explanation of what's going on here. So that's good. Well, let's talk about private credit and income funds over the past few years. We've heard a lot about them. What are people buying? What have people been buying? And where are they finding themselves at the moment?
So private credit is, again, like I was saying, a very broad asset class. We've arranged the different subsectors within private credit. So in Australia, investors have been attracted to both the high returns available from private credit, as well as the capital stability, given they generally are all floating rate assets. Okay. So that means they don't go up and down when interest rates go up. Then the types of private credit domestically, given the property obsessed culture we are part of, the majority of private credit domestically is backed by property. And then it can be a wide range of different types of property though. So it can be commercial property, it could be residential mortgages, The other key area of domestic private credit is corporate private credit, where large non-banks lend to both small and large corporates in either a secured or unsecured loan.
But then that's a different risk profile given it has the business risk. It's not just secured by private assets.
Okay, so let's take the next step then. So I'm with you so far. That all sounds quite sensible and you get your return. Fantastic in good times, I'm sure, and particularly in low interest rate environments.
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