How private credit can help reshape investment strategies for investors over 75 years
As the first of the baby boomers approach the celebration of their 80th birthdays in the next few years, a distinct change is being felt in financial services, with serious implications for financial markets.
As a fund manager who has observed behavioural changes in finance for more than three decades, I’ve observed a noticeable shift dominated by our seasoned investors, many of whom are over the age of 75.
There is a growing inclination of this demographic towards reducing risk, reducing exposure to more volatile assets, and simplifying their investment portfolios.
This change aligns perfectly with the natural progression of one’s investment journey, where simplicity, constancy, and relative stability become key considerations for investors in their later years. There will be a lot written about the great intergenerational wealth transfer and the baby boomers (those born between 1946 and 1964) becoming more fiscally conservative with age.
Enter private credit. Whilst still a relatively undiscovered asset class in Australia, it’s an essential part of the lending landscape in the U.S. and Europe. In the U.S. for example, it makes up more than 90 per cent of the U.S. lending market.
Here in Australia, savvy investors are starting to recognise the potential of private credit and, in light of the evolving preferences of older investors, it is quickly establishing its place in portfolios as a viable, if not preferred, investment alternative that ticks the boxes for simplicity, constancy, and stability.
Private credit offers a unique blend of benefits that are well-suited to this stage of life where family and lifestyle take precedence over watching the gyrations of the stock or property markets. In addition, rising concerns among investors – such as fears of a potential recession, higher interest rates and rising costs of living – may make private credit an even more attractive proposition.
Potential benefits of private credit include:
Reduced volatility: Private credit investments are less correlated with public investment markets, are less susceptible to their fluctuations, especially compared to equities, and aim for more stable and predictable returns.
That has certainly been the case with the Aura High Yield SME Fund for wholesale investors, with a minimum of $100,000 to invest. Since its inception in August 2017, the Aura High Yield SME Fund has paid a monthly cash return and has never experienced a negative month in its first 75 months (to October 2023).
Attractive yields: Private credit investments often yield higher returns than traditional fixed-income securities, (given the investment is tailored, and there is a direct relationship between the investor, manager, originator, and borrower) which is crucial for maintaining a solid income stream later in life.
The Aura High Yield SME Fund has averaged 9.61 per cent per annum (assuming reinvestment) since inception to 31 October 2023, beating the S&P/ASX 200 Accumulation Index over the same period with no volatility to capital. As noted, the Aura High Yield SME Fund has yet to experience a negative monthly return since its inception.
Portfolio diversification: Incorporating private credit into your portfolio can provide a valuable diversification benefit, reducing the overall risk exposure. While private credit is not appropriate for all of an investor’s portfolio, it is gaining an increasingly prominent role as an emerging asset class of importance. For those who want to reduce their reliance on more volatile asset classes, an investor can simply reweight their portfolio partially towards private credit.
At Montgomery Investment Management, we are already seeing the emergence of this shift towards simplicity and constancy.
Tailored investment solutions: The broadening suit of private credit offerings allows for customisable investment strategies, ensuring alignment with your individual risk tolerance and financial objectives is achievable.
A prime example of the efficacy of private credit is the Aura High Yield SME Fund. This fund has consistently delivered impressive returns by investing in a diversified portfolio of quality loans to smaller and medium-sized corporates.
It demonstrates the potential of private credit to generate meaningful and attractive returns while effectively managing risk.
For investors over 75 years, moving towards private credit doesn’t mean abandoning equities entirely. Instead, it’s about strategically adding another layer to their investment portfolio that aligns with their current life stage. This shift helps manage risk better and ensures a steady, and potentially attractive income stream, which is crucial at this age.
Adapting strategies to suit changing life stages is crucial, and we are watching the shift accelerate. Over 75’s are increasingly shifting focus towards more stable and less volatile investment options, such as the Aura High Yield SME Fund, which offers an excellent opportunity to balance the dual objectives of income generation and risk mitigation.
As fund managers, we witness senior investors’ unique needs driving changes in investment preferences. Private credit stands out as an option for those looking to simplify their investment portfolios while still achieving meaningful returns. With offerings like the Aura High Yield SME Fund, investors can enjoy the dual benefits of monthly cash income generation and reduced exposure to public market volatility, making it a compelling choice for the next decade or beyond.
Disclaimer
Find out more about the Aura Private Credit Funds here
You should read the relevant Product Disclosure Statement (PDS) or Information Memorandum (IM) before deciding to acquire any investment products.
Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.
This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura High Yield SME Fund (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and, subject to certain conditions being met, may be issued equity in the investment manager or entities associated with the investment manager.
The Aura High Yield SME Fund is an unregistered managed investment scheme for wholesale clients only and is issued under an Information Memorandum by Aura Funds Management Pty Ltd (ABN 96 607 158 814, Authorised Representative No. 1233893 of Aura Capital Pty Ltd AFSL No. 366 230, ABN 48 143 700 887).
Any financial product advice given is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs.
Montgomery, ACH and Aura do not guarantee the performance of the Fund, the repayment of any capital or any rate of return. Investing in any financial product is subject to investment risk including possible loss. Past performance is not a reliable indicator of future performance. Information in this report may be based on information provided by third parties that may not have been verified.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
