'Safe as houses' - reliable income as rates fall and dividends decline

The past few years have been kind to income-focused investors, who have enjoyed generous returns from higher interest rates and fully franked dividends from ASX-listed companies. But as the saying goes, good times don’t last forever.

The RBA’s much-anticipated February rate cut looks set to be the first in a new cycle, with markets pricing in at least an additional 50 basis points of cuts by November this year. While that’s welcome news for mortgage holders, it’s not so great for those relying on income-generating assets like term deposits, government bonds, and credit.

Dividends are also under pressure. Lower commodity prices have forced some of Australia’s largest dividend payers to slash payouts, while the yield on staple dividend stocks - such as the banks - are slim. Recent volatility in bank share prices and concerns of overvaluation are adding to headaches.

For investors seeking to protect their nest egg while earning a predictable income, this backdrop presents new challenges.

Chris Paton, Chief Investment Officer at La Trobe Financial, sees these cycles as inevitable. With over 70 years of experience, the firm has guided investors through a wide range of market conditions.

La Trobe Financial specialises in retirement income, managing over $20 billion in assets for more than 100,000 investors and 4,200 financial advisers. (1)

According to Paton, the good news is that this rate-cutting cycle is unlikely to be deep. In other words, rates aren’t expected to return to the emergency lows of the COVID era, when staying ahead of inflation meant taking on significant additional risk.

“I don't think it'll be a deep cutting cycle, certainly not with the broader macro picture we have in place. The ‘higher for longer’ theme may well persist.”

Paton believes staying focused on quality assets - and avoiding the temptation to chase higher yields - is key to minimising capital losses while maintaining reliable income.

“So the flight to quality that we've seen over the last five years, we think that will continue. For income investors, the priority should be finding yield without taking on excessive volatility.”

This focus on quality and diversification underpins La Trobe Financial’s investment philosophy and provides flexibility to selectively invest in opportunities with the potential to deliver higher-income.

Safe as Houses

One often-overlooked asset class for income investors is real estate private credit. Simply put, real estate private credit generates income from mortgage repayments made by people like you and me.

Australian mortgage holders recently faced their biggest test: the RBA’s rapid rate hikes and the so-called “fixed-rate mortgage cliff.” Despite the headlines, the impact was minimal.

“Australians performed very well. We are a very compliant country - we prioritise mortgage payments and adjust our lifestyle accordingly.

“So, through this rapid interest rate cycle, Australian borrowers showed resilience. Arrears for us remained within the historical range of 2.5% to 4%.”

While real estate private credit has proven its resilience, Paton says La Trobe Financial’s scale and expertise allow it to be highly selective in choosing where it invests.

“We're originating about $1.7 billion in new loan assets each month and deploying about a billion dollars. Our portfolio managers can be highly selective about the loans we accept.”

Diversification plays a crucial role. La Trobe Financial’s flagship 12-month Term Account is spread across more than 10,500 loans, with an average loan size of $900,000.

By holding many smaller positions, no single loan can significantly impact investment outcomes.

A call for greater transparency in Private Markets

In late February, ASIC announced plans for a closer review of Australia’s rapidly growing private assets market. Over the past decade, the sector has tripled in size, attracting both new asset managers and investors drawn to higher prospective returns.

As Australia’s oldest private credit investor, La Trobe Financial welcomes this review. Paton says increased transparency is essential to giving retail investors confidence in the asset class.

“We have a deep commitment to transparency in our La Trobe Australian Credit Fund. On our website, we publish thousands of data points on each of our portfolios for the world to see."

Paton says the goal of releasing this information is to give investors the same level of conviction in the portfolios as the firm has. It’s a level of transparency he would like to see adopted by other private markets managers.

“It would be great to see the industry embrace the same level of transparency that’s standard in public markets and extend that to private markets as well.”

Opening new markets for income-focused investors

In 2024, La Trobe Financial expanded beyond Australia for the first time, partnering with blue-chip investment bank Morgan Stanley to give Australian investors access to the US middle-market.

What is the US middle market? (I had the same question!)

Paton explains that it consists of more than 200,000 companies generating between US$25 million and US$1 billion in EBITDA. To put that in perspective, if the US middle market were a country, it would have the world’s third-largest economy - Australia ranks 13th.

“Australia’s GDP represents about 2% of the global economy. The US middle market is about 15%. We always encourage portfolio diversification. Broadening exposure can add resilience and reduce risk.”

The La Trobe US Private Credit Fund is currently available to wholesale and retail investors.

La Trobe Financial 

La Trobe Financial is a trusted leader in the Australian financial sector, with over 70 years of experience in providing innovative investment solutions. Specialising in retirement income-focused investments, the company has built a solid reputation for delivering reliable, consistent returns to investors. 

Learn more about opportunities for income focused investors here.