Yield for retirees in a low interest rate environment

Earning yield in a low interest rate environment is a particularly challenging issue for retirees seeking an income stream.

With official cash rates at a record 1 per cent, the Reserve Bank of Australia has indicated interest rates will remain ‘low and long’ for some time.

This has impacted returns on cash and term deposits, while yields on 10-year bonds has dipped to 1.04 per cent.

At a recent HUB24 webinar on the cash and income needs of investors, portfolio managers discussed this issue and where retirees might find yield in this environment.

According to Bond Adviser Director Investment Management John Likos, the starting point in seeking out alternative investment options to fixed interest is to discuss expectations.

“The wholesale market has a better grasp on adjusting return expectations. We are not in a high interest rate environment so you have to prepare investors for lower returns.”

Alternative investment options can be found in asset classes uncorrelated to fixed interest.
Lonsec Investment Solutions portfolio manager Danial Moradi, said defensive income segments such as AREITS, infrastructure, utilities, toll roads can provide stable earnings even if there are further interest rate cuts and the Federal government deploys fiscal stimulus.

Pendal Group’s Fixed Income Portfolio Manager Tim Hext said while equities may be getting a bit expensive, they still provide good investment opportunities.

“However in this environment, active equity management becomes very important.”

Hext also noted with the Federal Government in surplus, the Government had some economic arsenal it can use to stimulate the economy. “The Government has not started down this track so it can still play this card.”

On this point, portfolio managers said it was important for investors to differentiate between the cyclical and structural factors driving the low interest rate environment as this will help guide discussions around investment opportunities.

“Inflation is low but once this housing market turns, this will come back,” said Hext. “Meanwhile the global surplus of savings which is driving interest rates down is a structural issue. Unfortunately, if you’re a saver, you’re not needed as much.”

The portfolio managers warned investors against investments spruiking returns of 5-10 per cent.

“At this end of the cycle you are going to get a lot of new products promising the world,” said Likos. “But just don’t buy what you don’t understand.”

They advised investors take a core and satellite approach. “We are targeting 3-4 per cent so fixed interest can be the backbone of a portfolio and then with what is left over you can chase the higher returns.”