Australian retail investors: do they know what they are doing?

The plunge in cash rates means that investors are ignoring the cautious approach of previous times and ranging far from home in the search for yield.

Am I missing something? Australian mum and dad investors are rushing out of low interest bank accounts and pouring billions into global credit funds.

These are stock exchange-listed funds that buy debt securities that can range from top quality bonds to sub-investment grade “junk”.

The first part I understand - a move out of government guaranteed, low-interest term deposits is an inevitable and sensible step. After all, we know from tax office returns that many investors still have outsized cash holdings that barely keep pace with inflation.

The second part completely baffles me. It is an enormous jump from putting your money into a term deposit at your local bank to taking risks on global credit markets.

Moreover, the risks taken through a product where the fund is listed on the share market means that if there is a sell-off, these funds are very likely to drop in tandem.

Yes, the diversified nature of many of the funds can go a long way towards smoothing out the result. On this basis they should deliver their promised returns of around 3 to 5 per cent a year income.

But is it all worth it?

You would like to think that most investors know they have moved from one end of the so-called, “fixed-interest” spectrum to the other.

They surely know corporate debt is risky and “sub investment grade” corporate debt is the riskiest area of all.

Comparing these products to investment in local bank term deposits is comparing chalk and cheese.

Once upon a time sophisticated investors would have made sure they had corporate debt as part of a widely diversified portfolio and these holdings were invariably in unlisted trusts where the day-to-day vagaries of listed markets would not overtly influence prices.

The plunge in cash rates means that investors are ignoring the cautious approach of previous times and ranging far from home in the search for yield.

Brokers also receive fees for these funds often packaged as Listed Investment Trusts, which are exempt from financial commission bans.

This may change in the future, but for now the exemption stands.

Billion dollar raisings in this category are now commonplace: Neuberger Berman is expected to gather the best part of a billion dollars for its latest raising, Kohlberg Kravis Roberts raised about the same figure among local retail investors at the end of last year.

It makes sense to seek new forms of income as long as the approach is measured and the products are well-understood.

The managers behind these listed credit funds invariably have a good track record with strong brand name.

Indeed, they are leaders in the field who know what they are doing.

The new factor is Australian retail investors - do they know what they are doing?