Responding to signs of a potential slowdown, the Reserve Bank of Australia (RBA) has made three rate cuts in 2019, in June, July and October, bringing the national cash rate to a record low of 0.75%.
Some commentators are predicting another 0.25 percentage point cut by mid-2020. That would bring the cash rate down to 0.5%, which means investments like bank deposits will likely trail the inflation rate by 1.5 percentage points.
In other words, to store money in a savings account would be to lose money in a savings account.
The low-interest rate world provides a clear impetus for investors, especially those with a high allocation to cash accounts, to explore alternative methods for securely growing their wealth.
Cash in a bank might seem to be low risk, but in this low rate environment, once the effects of inflation and taxation are considered, it’s almost a guaranteed way to lose money.
Investors should be asking themselves: how do I keep my investments performing?
In this regard, fixed income investments have traditionally been an attractive option for investors looking for a steady income stream and seeking to stay ahead of the curve during an economic slump.
What are the fixed income options available?
There are many types of traditional fixed income investments available to investors, although some are difficult to access, and each offers different risks and benefits:
- Government bonds: high security through government guarantees although often offer modest returns.
- Corporate bonds: generally, less risky than buying shares in a company but repayments on interest and capital can be compromised if the company goes out of business.
- Mortgage schemes: typically, a type of managed fund that lends to borrowers to buy property or to undertake property development projects.
- Credit and fixed-income funds: actively managed funds with diversified exposures including corporate bonds, structured credit and various other strategies. These funds have been growing in popularity in a falling interest rate environment, with increased demand leading to tighter spreads. On the surface these may seem safe but there are potentially higher risks where the schemes are used to raise capital by property developers.
- Hybrid securities: a catch-all name that covers a range of often complex investments like ‘capital notes’, ‘convertible preference shares’ and ‘subordinated notes’.
However, none of the above traditional fixed income investments offer access to invest in consumer credit, an established asset class that has historically only been available to banks and other large institutional investors.
This is despite it historically being a relatively resilient asset class that has provided strong returns to investors even during financial downturns.
The peer-to-peer investing opportunity
Now, peer-to-peer (P2P) lending businesses, such as Plenti^, allow retail investors to tap into this attractive asset class at a time when other fixed income assets deliver lower than historic income/yield.
How Plenti’s returns compare
*Annualised asset class returns as reported by Morningstar for the 5 year period to 31 December 2019. Plenti data not provided by Morningstar. Please see below for a full explanation of how the asset class and Plenti returns are calculated. Warning: Past performance is not a reliable indicator of future performance. Different investments reflect substantially different risk profiles.
How does peer-to-peer lending work?
P2P lending, or marketplace lending, allows people to invest in a portfolio of consumer loans. P2P lending takes place via online platforms that match investors’ funds to approved, creditworthy borrowers.
In addition to providing a marketplace, the platform operator acts, in many ways, like a traditional fund manager, ensuring on behalf of investors that the rewards outweigh the risks.
For example, Plenti, Australia’s largest P2P lender with over 19,000 registered retail investors, assesses the creditworthiness of loan applicants; establishes loan contacts; facilitates payments between borrowers and investors; manages each investor’s loan portfolio; takes responsibility for loan enforcement and any collections; and provides investors with regular reporting and tax information.
Additionally, in the case of Plenti and some other leading global P2P lenders, the operator manages a fund to help protect investors from any credit losses incurred in the portfolio of loans.
Who does P2P lending appeal to?
P2P lending can offer a healthy middle ground for investors who want to earn better returns on their investments, without the volatility of a share market.
Everyday Australian investors now have a new way to access attractive returns, beyond traditional fixed income investments or more volatile equities.
P2P lending may be especially appealing to cautious investors who are seeking to build wealth but are frustrated with the returns they are earning from cash in a bank.
Those investors can spread their savings across a number of markets to maximise returns and customise their risk exposure.
Returns earned by an SMSF investor from the Plenti platform in July 2019:
Warning: Past performance is not a reliable indicator of future performance.
^Plenti was known as RateSetter prior to August 2020.
*Plenti 5 year performance represents average matched rate in the 5 Year Income market from 30 October 2014 to 31 August 2019. Other asset class returns based on the average performance of funds in each category as reported by Morningstar for the 5 year period to 31 August 2019. Data gathered from the following Morningstar categories: Australian Cash: AUS, Bond – Australia: AUS, Diversified Credit: AUS, Australian Equities Large Blend Different investments reflect different risk profiles. All figures stated represent the RateSetter Lending Platform only unless stated otherwise.