Where income-hungry investors can access quality cash flows

In an environment where interest rates remain at record-lows and term deposits can no longer deliver the yield they once did for income-hungry investors, there are still plenty of reasons for investors and retirees to be excited. 

That's according to MLC Asset Management's Anthony Golowenko, who believes there are some exciting opportunities within listed real estate investments, defensive industrials, as well as the Big Four banks and miners for Australia's income investors. 

Investments that can keep pace with the inflationary environment have particularly tickled Golowenko's fancy and he argues these assets can continue to deliver quality cash flows in a changing market environment. 

In this video and wire, Golowenko outlines why these assets can represent attractive yield for investors seeking income and dividends as part of a diversified approach to portfolio management, in an environment likely to see cash rates stay lower for longer than investors may think.

Note: You can watch the video below or read an edited transcript. This interview took place on 24th August 2021.

Edited Transcript  

Ally Selby: While the RBA has indicated that interest rates will rise in the coming years, it is still a hard environment for income-hungry investors to generate yield. What's your take on term deposits and cash rates? 

Anthony Golowenko: Going back post the Global Financial Crisis, cash rates were moved to emergency settings. Now at the end of 2018, there were actually more meaningful interest rate increases. Now that turned around very early in 2019. And since then, beyond conventional measures, central banks have increasingly adopted unconventional measures. And the result is the world is awash with liquidity. Unfortunately, that means investments such as term deposits or even outright cash rates have been demonstrably decreased and their role within a portfolio to meaningfully deliver on that foundation of income has been certainly less than it was.

The interest rate outlook is going to certainly take some time to adjust in what's going to be a very gradual process to get to the future desired end state of near full employment or moving towards full employment, and also moving towards meaningful, sustained real wages growth. And we are, at least in my view of the world, many years away from that. So, unfortunately, not a lot of good news in terms of term deposits and cash rates. There is an ability to incrementally achieve some yield and some income, but certainly, be aware of the risks you're taking to achieve that.

Do term deposits still have a place in investors portfolios or should they be looking elsewhere for income? 

Term deposits are interesting. The underlying banking system, and as I touched on with central banks, certainly, there's a lot of liquidity. Now that means the need for capital or the need for deposits is not what it was. Probably good news is a movement or a migration into online banking. And those online banks having much lower overheads, have an ability to offer at least incrementally higher yield. So it's not all bad news. It's not all bad news for term deposits. They are evolving in the way that they are being delivered. We would advocate for liquidity, and being clear on liquidity requirements, and certainly not taking a lot of risk there. But beyond that, even investing incrementally into unlisted investments with an illiquidity premium or a complexity premium that can be harvested. Increasingly, we're seeing those sorts of opportunities become available. But we advocate that those certainly form part of a diversified approach.

Where can investors access quality cash flows in this environment then? 

Well, I think there's a range of options. And again, from a standpoint of risk and reward, we view these mid-risk assets as an opportunity - those that sit between traditional bonds and fixed interest and credit investments but not to the same extent of risk as equities and even private equity. Within the current environment, we see global listed infrastructure offering appealing cash flows both in and beyond the medium term. We like the nature of them keeping pace with inflation. So when I say real cash flows, that's what we're seeking to harness within our portfolios.

That could be an airport, a toll road, critical transmission lines, or water transport, those sorts of investments. We view those as having a place in portfolios to provide a foundation of regular meaningful income. Also, within REITs and probably the one area we're not quite there, in terms of the risk-reward, is big-box discretionary retail. But beyond that, whether it's industrial, whether logistics, high-quality office, neighbourhood shopping, and even some of the more niche sub-sectors around healthcare and agriculture, which are very slowly becoming available in listed markets, and more so, a much broader opportunity set in private markets.

Are there any names you could share with our readers?

Recent results that have come out of the real estate sector in Australia have been quite strong. Centuria Industrial (ASX: CIP) coming out with a growth pipeline, but also doing hard work in terms of leasing and quite meaningful asset re-valuations. Beyond that, Charter Hall (ASX: CHC) has come out and across its multichannel funds management business, core office, industrial logistics, and partnerships - and have delivered north of $10 billion in strategic partnerships over the past seven years. And by doing so, in a sale and leaseback, can work collaboratively and constructively with their clients. So there are two names that we see within that REIT space that have delivered really consistent results, are growing, and can deliver meaningful, real cash flows.

In other areas like industrials, you may be looking at a different journey and potentially moving outside of that sort of REIT structure. But something like Amcor (ASX: AMC), in its result it announced they're increasing their global business, it's very well managed. Their major Bemis integration and acquisition is bedded down and they're extracting costs. We just see that as being a steady, diversified, very well run, very well managed business. And having a quality core, particularly in delivering consistent income that's going to grow in line with inflation.

We've seen incredible dividend growth out of the banks and iron ore miners over the past year. Is there anything else investors can get excited about?

From where we've come from, I appreciate the view of term deposits and major banks being a sole source of franked income. That's been challenged. Fortunately, we have seen a range of investment opportunities and a range of yield-related investment opportunities coming back online. And certainly, the major banks' results have been resilient. We're seeing off-market buybacks, which can provide a real benefit to those retirees.

You mentioned the major miners. Where we're looking there is really around low cost of production, high-quality long mine life, and access to infrastructure. And with that combination, even we see prices moderate from these levels, with the volumes coming through and the demand for steel making, the demand for infrastructure, the demand for key materials of which Australia and major miners have, and deliver amongst the lowest costs in the world, that certainly is a bright spot for retirees.

We would probably just remind investors that the banks are effectively now lending machines. They're exposed to the broader economy. So a more diverse approach and resilience is needed in looking to deliver that. And beyond major miners, we're also seeing industrial companies, like Amcor, that may not have the highest yield, but it has a growing business, a very well managed business, defensive attributes, and is really high quality. So as part of a diversified approach, seeking income and dividends, we see those sort of investments representing what retirees do have to look forward to in this environment where yield, as you mentioned, has been challenged.

Learn more

MLC Asset Management's portfolios combine their best thinking on asset allocation with a disciplined investment process - developed over 35 years - that optimises returns and reduces risk. For further information, please visit their website. 

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