What can we help you find?
Search by Topic

Your search had no results

Please try the following to find what you’re looking for:

  • Check your spelling
  • Try different words or word combinations (E.g. "fund form")

Michael Korber: How to find higher income without excessive risk

Download a PDF of this Article
Print this page

 

Investors tempted by private debt’s higher yields should beware of taking on excessive risk, argues Perpetual’s Michael Korber

 

The growing popularity of private debt is leading many investors to take on excessive risk in the search for higher returns, says Perpetual’s head of credit and fixed income Michael Korber.

Two main factors are driving interest in private debt: the hunt for higher yield and tighter regulation pushing banks out of their traditional lending roles.

But there is a wide range of quality in the fast-growing asset class – and investors should take a close look at the underlying investments, says Korber, who has four decades of experience in fixed income investing.

“There is a lot of noise in investing — you see all this advertising for all sorts of high-yielding strategies.

“People are tempted by private debt because it offers a headline return well above term deposit rates.

“There is sense in investors taking on additional risk, up to a point. But beyond that, it's just not worth it.

“What you actually receive is highly dependent on who the money has been lent to.”

Caution on private debt

Private debt appears attractive because it sounds like a homogeneous asset class and has gained some respectability due to its label, says Korber, who oversees Perpetual’s Credit Income Trust and Pure Credit Alpha Fund.

But in reality it encompasses a wide range of loan qualities.

“Private debt is not a security you can trade – it’s just a loan contract between two parties.

“Lending is the bread and butter of banks, and the quality of loans can vary significantly.”

Many private debt products lack a significant track record and transparency and are typically heavily exposed to real estate markets, says Korber.

“It can be high quality. One example in our portfolio is Arnotts, an extremely resilient, household name.

“But it can also be low quality — for example a third mortgage on an individual trying to develop a block of flats.

“It can be attractive, but it can also be just awful.”

Risk ahead

While fixed income investments are typically expected to provide a certain rate of return, this expectation can fail if a borrower defaults.

“Through any economic cycle, there are periods where loose lending is very productive because there's money around and borrowers can pay,” says Korber.

“But when conditions tighten, many borrowers fall by the wayside.

“The true quality of these assets is often not visible to investors, and you have no real way of gauging this until economic conditions worsen.

“These products are often sold as blue-chip investments, but the reality can be starkly different when the market turns. Investors might find themselves losing substantial amounts of money.

“What can sometimes be missing is an element of fear among investors about getting too aggressive — you should be confident that you can do better than cash or term deposits, but acknowledge that if you push the envelope too far, you could come unstuck.”

Quality assets are key

Where should investors turn to find better income returns?

One answer is to focus on high-quality assets.

“At Perpetual, we have been doing this for a long time. We're an institutional-quality investor, so we attract good-quality borrowers who are worth investing in.

“We are not of the view that rates will drop in a huge hurry – and the assets we invest in are somewhere between two to six years average maturity, so you have a longer coupon flow than your typical term deposit.

“From our perspective cash has had a good run, credit has had an even better run — that should continue, but don't fall into the trap of too much of a good thing.”

 

Learn more about Perpetual’s Credit and Fixed Income capabilities

Find out about Perpetual Pure Credit Alpha Fund

Questions? Contact a Perpetual account manager

Michael%20Korber.jpg
Michael Korber
Managing Director, Credit & Fixed Income
BEc
Michael Korber
Michael%20Korber.jpg

Michael Korber

Managing Director, Credit & Fixed Income BEc
Bio

Years of experience: 42

Years at Perpetual: 19

Michael Korber is Managing Director, Credit & Fixed Income and is responsible for the ongoing strategic review and development of process, reviewing the weekly credit process and reviewing the analysis of all new credit securities. Michael joined Perpetual in August 2004.

Michael has over 40 years industry experience and prior to joining Perpetual worked as the first Head of Credit at Macquarie Funds Management, spending six years developing its credit investment processes and building the business from inception to over $7 billion in funds under management.

Prior to this, he spent seven years as Divisional Director in Corporate Banking and four years as second in charge to the Head of Macquarie Bank Credit. Earlier, he had spent five years as a Credit Analyst with Westpac Corporate Banking.

This article has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. PIML is the investment manager, responsible entity (RE) and issuer of the Perpetual Pure Credit Alpha Fund ARSN 121 609 747 (Fund). Perpetual Trust Services Limited ABN 48 000 142 049, AFSL 236648 (PTSL) is the RE and issuer of the Perpetual Credit Income Trust ARSN 626 053 496 (PCI). PTSL has appointed PIML to act as the manager of PCI.

This article is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Any views expressed in this article are opinions of the author at the time of writing and do not constitute a recommendation to act.

The product disclosure statement (PDS) for the Fund, issued by PIML, should be considered before deciding whether to acquire or hold units in the Fund. The PDS and Target Market Determination for the Fund can be obtained by calling 1800 022 033 or visiting our website www.perpetual.com.au. 

Before making any investment decisions you should consider the PDS for PCI (dated 8 March 20) issued by PTSL and the Trust’s other periodic and continuous disclosure announcements lodged with the Australian Securities Exchange (ASX), which are available at www.perpetualincome.com.au or can be obtained by calling 1800 022 033.

No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of the Fund or PCI or the return of an investor's capital. This information does not constitute an offer, invitation, solicitation or recommendation with respect to the purchase or sale of PCI’s units.