10% pa income guaranteed ?

Hi everyone,

Earlier in this thread I said this:

'You could get 10% pa income guaranteed - no market dependence, volatility, unpredictability - with fixed term investments currently on the market!!!'

I found something that could (sort of) come close to getting this! - thanks iiinvestor for jogging my memory on this one, and they are basically and broadly called 'fixed interest securities'.

They do have an element of RISK though, and are not for everyone one, and currently I do not invest in this area. I believe the risk element can be mitigated by intelligent investing and thorough understanding of the nature of 'risk' involved in these investments - so potentially these types of investments could be an interesting addition to your investing toolbox.

The following is extracted from the smh article link below:

Ellis and Nelson say that income securities demand that investors also understand the idea of "credit risk" - the risk that the issuer of the security will not be able to make an income payment as and when it falls due.

"That is driven by their ability to meet the obligation on the note or security," Nelson says. "It's not driven by the fact we think this is a great company and we think the share price is going to increase."

Read through the following links, and let me know what you think...

General Information:

About Fixed Interest Securities - fisecurities
Regular Income - fisecurities
Fixed Interest Risk - fisecurities

Specific Investment Examples

fisecurities - ACDHB
fisecurities - HBRHA
fisecurities - ABCG
fisecurities - SRLG
fisecurities - OSHPB

Newspaper Articles

Funds and games: generating returns from securities - www.theage.com.au
smh.com.au - The Sydney Morning Herald

Note: I just found these links on a quick search, and have not read through the specific investments in great detail...but hopefully it will generate some intelligent discussion.

GSJ

 

Nice bit of research there GSJ; some with 10%+ coupons too.

Depending on the type of security (convertible note, hybrid, debenture, etc) the borrower (the company) may "call" the security, which means you may have to return the security or have it converted to an ordinary share or a range of things. Just something to think about when considering the long-term needs of a personal investor.

There are a range of specialist terms that accompany these securities so you know the conditions (non-renounceable, non-callable, etc).

Also, many of these securities are traded on the ASX.

 

Bump!

Bump...?!

What happened, you guys asked for the '10% pa guaranteed' (this is as close as it gets) - and I brought it to the table, but only 1 reply on this thread...???

GSJ

 

Well, I need a 'guaranteed' 10% more than ever, but I need some time to do some more research. The reason you get 10% with those fixed-interest securities is that the risk of default is high. If a company defaults, you may lose all of your capital, along with the future income. So for me, it's about weighing up the risk of an equity investment that does not pay the promised income (and maybe some capital loss), with the risk of a debt investment being defaulted and losing some to all of my capital. Obviously diversification would help, but I'm still unsure.

It would be nice if we could buy 10% yield property at the moment. Even if capital growth was far off, it would be nice for cash flow.

 

I was one of those people. Thanks for researching this, I'll look into it but life is busy

 

Does anyone have any history or comments on hinterlandtimber. 12% pa?? They advertise on this site, so I was hoping someone may have some background.

 

Hi GSJ. I'll check it out when I get a chance, but at the moment I'm still looking for 15-20% (or higher) returns. Thanks for going to the effort.

Cheers,

Steve P

 

Hi GSJ

The other question I have with your 10% guaranteed investment, is can you margin into it? This is what the majority of people are doing with the NI income fund ie use LOC and then margin at 50% into a managed fund.

If the risk of default is high, you wouldn't want to be using borrowed funds of any kind to invest .

Gazza

 

If the risk of default is high, why would you want to invest in it with any money - borrowed or otherwise?
Also, I dont profess to know anything about these types of investment, but surely if it is high risk as some people suggest, would you seriously consider investing in something high risk when the absolute maximum return you can get on it is 10%?

 

It's all relative, higher default risk than the government, for example, doesn't indicate how likely it is. These are still big companies with reliable cash flows, they just aren't as big as others and may have more debt than others.

 

GSJ

Something you may or may not find interesting:
I have been reading a couple of books by a guy named Van Tharp, and he writes of a strategy in his book "Safe Strategies to Financial Freedom". The strategy is based on fixed interest investments around the world. At any particular time, one region or country in the developed world will have a given interest that is paid on cash investments such as bank term deposits.
This strategy suggests that you monitor which countries currently have which interest rates, and invest in secure fixed interest cash investments in the highest interest paying country.
The book was written a couple of years ago, and Australia/New Zealand were the places of choice at the time (and still the case I think). The 30 year history he has in the book shows that there is an average double digit return.
Obviously for such a strategy to work you would need to expect that there will be high interest rate times again somewhere around the world in the future.

 

That's what "carry trade" is all about... in essence. But foreign exchange rates play a big part in this type of investing. In theory, FX rates should reach an equilibrium based on the cash rates in the opposing countries. That is, in theory, if you invest somewhere because of the higher rates of return, then the FX rates should neutralize that opportunity.

See arbitrage theory and parity of rates/FX.

But of course finance theory and reality are worlds apart.

 

Here's an example of a "yen carry trade": let's say a trader/investor borrows 1,000 yen from a Japanese bank, converts the funds into $ U.S. and buys a bond for the equivalent amount.
Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change.
Many professional traders/investors use this trade because the gains can become very large when leverage is taken into consideration. If the trader in above example uses a common leverage factor of 10:1, then he/she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the $ U.S. were to fall in value relative to the Japanese yen, then the trader/investor would run the risk of losing money.
Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

 

An example of the risk of this sort of product, risk of the provider going bust as mentioned elsewhere by Nigel, would be Fincorp.

Fincorp Group in administration | The Courier-Mail

I imagine there are a couple of others out there in the wings.

The sad thing is that the investors weren't even getting a decent return.

Sincerely hope none here are affected.

 

Like Lauries I sincerely hope no InvestEd members have been hit by this or by the Westpoint debacle.

Very early on in InvestEd's existence (around 18 months ago) we did flag the riskiness of these so-called secure high-yielding debt instruments.

http://www.invested.com.au/7/debenture-stocks-113/?highlight=debenture#post496

Cheers
N.

 

Average loss of 285k? That would have to hurt a lot.

 

Av loss more like $25k, however, a few investors with some substantial losses.

CB

 

How much of a guarantee is required? I've tried to find anything to meet this criterion and basically it just doesnt exist UNLESS you change your definition of what constitutes a guarantee.

If the requirement is absolute bank deposit type then I believe the best you can do is 6.8% through bankwest telenet saver account. I currently use this for all my personal cash and all my childrens cash. For Business accounts I utilize their Telenet Business @ 6.35. If any one has a better cash rate Please let me know.

I now have my long term debt through NAB fixed interest, 10 years at 6.95% again I'm hoping to find a better source.

I am considering the following options as 10% type returns,

Multiplex Development and Opportunity Fund.
My thinking here is:
if you need an income only type fund this is worth considering. It is currently returning around 13%. Its value to me as an income investment is that its return is guaranteed by Multiplex at 8%. What does this mean - as far as I can see it means multiplex underwrite the 8%pa but get back underperformance in the good years, overperformance comes straight through as distributions.

Do you have a guarantee - NO! But, If you examine this rationally, it is a significantly better option than Fincorp type investments.

I have put my mum (84) into this(!!!!). Because, she sold her house, put her money in term deposits, and is paying tax instead of getting a pension.

The capital growth is next to nothing, but mum doesnt care. She just needs more weekly income.

I know this is not Capital guaranteed - but, I feel it is abetter investment than most capital guaranteed offers.

For myself I'm considering hinterlandtimber.com.au , this is an investment in buying green timber and selling dry timber. Again no guarantees, but to me it is reasonable risk/return.

The equation here is you buy the right to green timber Plus the right to sell the dry timber. Straight up 12% (assuming still there etc). Advantage is this is 12 months and a capital gain, so 50% discount on income side.

I've made the decision and put my money in Multiplex. Tonight I checked hinterlands site and they are now guaranteeing 14%.

Anyone care to comment?