How to Earn 7.35% on Your Savings
Hi Scott,
I’m not your typical Barefoot reader. I’m a senior executive who reads the Australian Financial Review (AFR) and has a digital subscription to the Wall Street Journal. In other words, I’m well read! I have been lately interested in private credit, which has exploded in popularity since the GFC, after banks stopped lending to businesses. Specifically, I read about a new product by fund manager Pengana (and Mercer) called TermPlus which is currently paying 7.35% per annum. What are your thoughts on this?
Raymond
Hey Ray!
Well, you do sound like a very smart sausage.
Funnily enough, investing in private credit is a lot like buying snags: in both cases the key question you want to know is “what went into the sausage?”.
Was it pork? Chihuahua? Toenail clippings?
Similarly, I’d want to know who these fund managers loaned the money to, and, more importantly, how these borrowers are coping after 13 consecutive interest rate rises.
To scratch my itch, I went digging through their product disclosure statement (PDS), but alas it was like reading a Dr Suess book – completely nonsensical. The only thing that stood out was the fees, which are outrageously high – 1.94% per annum, plus an additional 1.01% performance fee. Talk about green eggs and ham!
Look, staying the hell away from whatever Wall Street is selling has served me well in my career – and private credit is being sold really hard now. It’s being touted as a way to earn much higher returns than a bank term deposit, without the risk of shares. If only it were that simple.
It’s not that simple.
The managers are making a fortune in fees, to be sure, but it’s the depositors who are ultimately taking the risks. And remember these funds are not guaranteed by the Australian government, the way that traditional bank term deposits are up to $250,000.
Truth be told, I’m very conservative, but that’s because I still have PTSD from dealing with heartbroken retirees who were sold (supposedly low-risk) investments that were paying higher returns than bank deposits, and who ended up having their money frozen or lost.
My view?
A good term deposit will generate you roughly 5.25% per annum, guaranteed by the government. That seems like a decent place to park your short-term cash (money you don’t need in the next five years should be invested in low-cost index funds).
Phil, I know you’re well read, so perhaps I could point you to my son’s favorite nursery rhyme book and his favorite ditty, which makes a compelling case for the risk of private credit lending that their PDS doesn’t: “Ten fat sausages sizzling in a pan, one went ‘pop’ and another went … ‘BANG!’”.
Scott.