Investors need to be realistic in their search for yield and avoid making mistakes such as becoming over-exposed to risk, warns Chris Bedingfield, principal and portfolio manager with Quay Global Investors.
“Investors must accept that central banks throughout the world will continue to maintain a low interest policy for some time,” Mr Bedingfield said.
“It is likely to be a while before economic confidence returns and governments and central banks recognise that quantitative easing does not stimulate the economy nor generate inflation.
“Until then, investors may have to adjust expectations and avoid taking on excessive risk by chasing unsustainable high yield investments that may be offered.”
Mr Bedingfield added that the global low interest rate environment is creating some myths among investors.
“For example, low interest rates are not always good for real estate – much in the same way rising interest rates are not always bad.
“Low interest rates can also distort other investment classes, for example in equities where lower marginal returns on capital will reduce profits and dividends over time.
“Another example is bank stocks. They have been one of the more favoured investment choices in a falling interest rate environment as they have given a high return on equity, supported by high dividend yields and growth.
“But as Australian interest rates head lower, the risk is that bank margins may contract as the net interest margin – which is the difference between the average funding/deposit rate and lending rate – will be very hard to sustain.”
Mr Bedingfield said that investors who are choosing property as a mainstay for income could also be making a mistake.
“The distortions caused by low interest rates in real estate are no less pronounced than they are in equity markets.
“As investors chase yield in real estate, ever higher asset values – measured by implied and actual cap rates – bid up the underlying bricks and mortar.
“While short-term investors feel they are getting a better ‘yield deal’ compared to cash, what they may really be doing is acquiring the underlying property at a premium to replacement cost. The result is a supply response which in turn acts to depress rents and values over time.”
Mr Bedingfield said the key for long term investors, in particular, is to look past yield and concentrate on good underlying businesses with a defendable market position and long-term secular tailwinds, or buying the underlying real estate at a discount to replacement cost. Stock selection will be more important than simply allocating to yield.
“A well managed diversified portfolio remains as good a defence against a low interest rate environment as it does against volatility.”
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About Bennelong Funds Management
Bennelong Funds Management is a boutique fund manager nurturing a growing suite of asset management teams. Bennelong’s boutique partners collectively manage approximately $6.5 billion in funds under management. It is a wholly owned subsidiary of the Bennelong Group, a privately owned funds management and investment business. Visit bennfundsmanagement.com.au
About Quay Global Investors
Quay Global Investors is a boutique investment manager focused on the preservation and creation of wealth through innovative strategies in real estate securities.
Quay was launched in May 2015 as a partnership with principals Justin Blaess and Chris Bedingfield and Bennelong. Prior to this, the business operated as Quay Real Estate Advisors which was founded by Justin and Chris in 2013.
The founding partners have over 40 years of collective experience in direct property, equities research, investment banking and investment management across domestic and global markets, giving them a unique skill set and perspective which they bring to the management of a portfolio of global real estate securities.