Low interest rates are causing otherwise conservative investors to take on more risk.
It’s a challenging statement, until you consider that the average Australian saver uses cash and term deposits as a major part of their medium to long term investment strategy. With $1.8 trillion invested in cash and deposits and rates of return at the lowest level we’ve seen in many years, it’s not surprising investors are looking for other ways to grow their savings.
Typically as someone enters retirement, they have greater desire to preserve their capital. It makes a lot of sense. Without a wage to refill the coffers when investment returns are low (or negative), they have less desire to take on risk. Historically their house, a term deposit or two, and the pension formed their nest egg. Income from their deposits would help to supplement their lifestyle, but with Australians living longer, and interest rates so low, you either need more savings or a higher return to fund your retirement.
Even for younger Australians, investing in deposits can represent their entire net worth, as housing affordability skyrockets and super is untouchable for years.
Current cash and deposit rates of around 2-3% are dissuading investors on both ends of the age spectrum from these low risk (and now low return) investments.
Investors are either:
It’s the latter point that investors need to exercise some degree of caution. There’s more to an investment than it’s potential return. Most investments carry a number of risks that the investor needs to be comfortable with and compensated for, such as liquidity.
Investors that seek professional advice will usually formulate an investment strategy to meet their needs. We have covered the asset allocation approach to investing previously, so we won’t go in to too much detail here. The point to note though is that it’s important to understand the percentage of the investment which is allocated to each asset class and hence where it sits on the risk spectrum.
For sophisticated and wholesale investors, stock brokers may give you access to wholesale investment platforms which enable you to invest in offshore bonds, gain currency exposure, or buy Google shares (for instance).
For the investors who are educating themselves, the Fintech revolution has introduced a number of different platforms, investments, products and markets to achieve their investment objectives. These tend to operate under a “general advice” structure, which means no one has considered whether this suits your personal situation or needs. This includes robo-advice portfolio construction at the high level, managed funds, and exchange traded funds.
Technology has been unlocking and disrupting some traditional markets which have previously been the realm of the banks. Again, a number of these new operators like peer-to-peer (P2P) lenders will only deal with sophisticated or wholesale investors for regulatory reasons. P2P can include everything from personal, motor vehicle, bricks and mortar, and business finance.
Factoring (or invoice financing) is also experiencing a technology makeover. Andrew Petris is founder of InvoiceBid, which allows sophisticated investors to invest directly into a business’s receivables.
Petris says there are few options for investors in Australia, particularly in fixed income; “this is despite Australia having one of the largest superannuation industries in the world (around $2 trillion), it has one of the lowest rates of returns on that capital.” He says his investors have expected rates of return of between 1% and 2% per month on each transaction, adding up to IRRs in the double digits. “All invoices have short terms of between 30 and 120 days, and the debtors tend to be blue chips”. His technology platform enables investors to buy as little as 5% of an invoice, allowing them the opportunity to spread their risk over multiple invoices.
Australia has a unique distinction from other marketplace lenders globally. The government has developed the Personal Property Securities Register (PPS), which allows financiers to register their security interest on the property of a person or business. Using the PPS gives Australian lenders a first ranking priority over the named property. With this added security, investors can become secured lenders, cut out the middle man… potentially earn a higher return on short term investments.
Disrupt disrupt disrupt.
InvoiceBid enables businesses to raise short term finance by selling their unpaid invoices directly to a network of investors. It’s the first time individual investors have been able to access invoice finance in an easy to use, online platform. Until now, unless you were a bank or specialist finance company, the opportunity to buy discounted invoices was limited to privately negotiated transactions. InvoiceBid has opened up that market to sophisticated investors allowing them to earn returns on an asset class without the costs of setting up a new business and having to seek invoice finance clients.
The InvoiceBid online platform is a marketplace that brings together those that need extra funds to finance business expansion with investors that are seeking a return on their capital. Sellers get fast, cheap and flexible working capital finance and investors are able to earn above average returns on their capital. Benefits for investors also include the ability to diversify their portfolios and participate first hand in helping to support the growth of Australian SMEs.
