Shares, cash are headed for double-digit returns this year so why the rush to unlisted assets?

Fear of missing out is gripping the market and this time it’s with unlisted assets, but traditional investors are this year’s big winners.

Despite advisers inviting investors to plough money into the “new things” those who kept their nerve have done well.

Congratulations, as an independent Australian investor you have done very well, yet again.

All the surveys suggest you didn’t diversity enough and you continued to allocate too much to shares and cash.

You resisted the madness of crowds which rushed for bonds, or “liquid alternatives” and stuck to what you know and understand.

Well it looks like you will roll home with double-digit returns again this financial year. Meanwhile your cash in term deposits is probably getting 5 per cent – government guaranteed. Beat that!

Despite all the talk of recession, despite those advisers who strongly suggest you plough money into the “new, new things”, you kept an eye on the prize and it has all been worthwhile.

Not that there’s anything wrong with diversification – it makes a lot of sense to have property or gold, or selected managed funds in the mix.

But as we face a sudden torrent of promotion for unlisted investments it’s a good time to distinguish between what actually works and the price you may pay for your fear of missing out (FOMO).

After all, the goals of a fund manager or a financial adviser are not the same as your goals – the fund manager needs you to send in money so that they can get paid. Your adviser is going to get paid anyway, but if they ever want to sell their business they must make sure you are a profitable asset on the books.

This is why we get the disdain for the mundane – the suggestion that as investors we are somehow a little slow and unskilled because we don’t have “that product” which is only available on “that platform”.

If someone goes to the trouble of starting a fund, then they won’t suggest it is not suitable for you. If an adviser has most clients on a platform where a lot of the work is done by someone else, they are unlikely to volunteer for extra duties on your behalf.

The most obvious version of this sort of thing – where an activity may have been very profitable in its early incarnation and is now being pushed on the mass market – is the craze for unlisted or so-called private investments.

To paraphrase Sir James Goldsmith “... by the time you can see the bandwagon it’s probably too late”.

When there are few in the game, the money is there to be made. Later on, the hordes arrive at the very same time that opportunities become scarcer, the margins thinner and the risks rise exponentially.

This year’s version of that risk is the rush into private credit.

The very best funds with a front-row seat on the very best deals – and this will include some of the larger industry funds – will do fine. Those who are late to the party run the risk of slim pickings, if not actual rubbish.

How many examples do you want? How far back do we have to go? Does anyone remember the “Lloyd’s Names” scandal when a spectrum of rich and well connected Australians could not resist the prospect of getting into something an inner circle had been making money from for years? Of course they were put in the weakest syndicates with the worst risks and many lost a lot of money.

The rush to private credit is perhaps at its midpoint. This is a golden stretch for promoters when the strong returns made in the early days of the game can be trotted out as evidence, but the weakness of too many snouts in the trough has yet to become a problem.

Let’s hear from someone deep inside the credit market. Franklin Templeton fixed income portfolio manager Andrew Canobi sounds very cautious indeed.

All markets are cyclical and Canobi’s latest message is that credit markets are not quite as good as they recently were.

“When we look at Australian investment grade through this lens, it starts to resemble global markets like the US. Not at all times tight but again, not too far away,” he says.

“The downturn always comes, and its genesis is often hard to predict … For now, the train is still on the tracks but it’s certainly slowing down.”

Now if I were heading for a 12 per cent total return this year on my Australian shares (pre franking) and I had double-digit returns last financial year as well, then I would be very cautious moving into unlisted assets.

Selling out of shares to buy an unlisted asset is a risky business. An ETF on the sharemarket has done better than a lot of managed funds last year, irrespective of where they have placed their money.

Consider bank stocks. After missing the rally in bank stocks earlier this year, big broking companies put “sell notes” on the major banks.

As I said back then “bank stocks may turn out to be a lot more resilient than global brokers expect”. I might as well say it again now, because in May when the sell calls went up, CBA – the bellwether stock for banks – was about $112 per share. Today it is trading at $125 per share and it is up 30 per cent in 12 months.

Here’s the rub: If you sold your bank stocks when the brokers suggested, you would be well out of the money. The brokers may be proved correct some day, but in the meantime they have got it wrong.

Row your own boat, minimise unnecessary fees and don’t worry about FOMO – history suggests you will do very well. Congratulations again.

James Kirby presents the twice weekly Money Puzzle podcast

Originally published as Shares, cash are headed for double-digit returns this year so why the rush to unlisted assets?