Gryphon Captial Investments said the Reserve Bank of Australia’s (RBA) recent rate rise – its first rate hike in over a decade – will mean that some advisers, particularly younger planners, “have never known an inflationary environment.
Gryphon co-founder and CIO Ashley Burtenshaw said the rate hike could make it hard for younger advisers to advise investor clients on how to obtain “reliable income with defensive characteristics” in today’s environment.
“A key for fixed income investors today is to invest in credit that is linked to cash rates, such as residential mortgage-backed securities (RMBS) that have a floating rate of interest that increases if rates go up,” Mr Burtenshaw said.
“For example, rates of combined RMBS tend to follow the RBA cash rate.
“They are also often seen as a safer haven asset and can help cushion a portfolio that may be too heavy on equities.”
To address this, Mr Burtenshaw suggested younger advisers learn more about RMBS and ABS as sources of income, particularly for income-focused clients.
“For instance, not all advisers realise RMBS sit high in the capital structure and consequently issuers are required to pay these obligations in full ahead of senior unsecured bank debt, hybrids or dividends, providing additional security,” he said.
“RMBS issuers must pay their RMBS obligations in full prior to being able to allocate cash (profits) to pay anything else such as senior unsecured bank debt, hybrids, or dividends.
“Our in-depth and specialist focus on the domestic mortgage landscape reveals a level of certainty around borrower affordability and we see no reason why RMBS can’t continue to prosper in delivering the highest comparative returns for the risks involved for income investors.”
At the start of May, the RBA chose to lift the cash rate from a record low 0.1 per cent to 0.35 per cent with governor Philip Lowe saying at the time that “the board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”.
In the same statement, the RBA upped its inflation forecast for 2022, predicting headline inflation of around 6 per cent and underlying inflation of around 4.75 per cent. These are up from 3.25 per cent and 2.75 per cent respectively.
By mid-2024, the bank is expecting headline and underlying inflation to moderate to around 3 per cent.
How many portfolio managers at Industry Super know about an inflationary environment?
Younger …. it’s anyone under 50!
Only have to look at the voting outcomes from the federal election to realise economic management and economic sense is unimportant for a generation and a half of voters.
It’s not until these voters feel real economic pain of lost savings, higher interest rates and unemployment that they will start to rank the economy higher than other ideals.
As advisers it’s our responsibility to educate because there’s no-one else doing it. Unfortunately you can lead a horse to water.