Interest rates are decreasing. Most economists expect the Reserve Bank to cut rates three more times this year, bringing the RBA cash rate to 3.1%. Dividend yields are also declining as the market has rallied, while earnings haven’t increased at the same pace. The prospective yield for CBA is 2.7%, Telstra is 3.9% and Westpac is 4.6%. For the ASX overall, the weighted average yield is now below 3.5%.
Investors who prioritise income may need to consider higher-risk options or adjust their expectations.
Here are four listed credit funds to consider. These funds invest in commercial loans and other securities, which present a higher risk compared to term deposits or government bonds. However, they are diversified and have a reliable track record of providing stable, higher income returns across most market cycles.
It is important to note that during economic downturns, like the recession of the 1990s, the Global Financial Crisis of 2008, or the COVID-19 crash in early 2021, these funds could experience losses, and the unit price of the fund will fall.
Buyer beware. Invest in moderation and diversify.
- Metrics Master Income Trust (MXT)
The Metrics Master Income Trust is designed to give investors direct access to a segment of Australia’s corporate loan market. Traditionally, this market has been dominated by regulated banks, leaving non-bank investors with limited opportunities. MXT fills that gap by investing predominantly in corporate loan portfolios.
It targets a return to investors of the RBA cash rate plus 3.25%, net of fees.
MXT invests is a sub-trust that invests in three wholesale funds managed by Metrics. These wholesale funds make the direct loans to predominantly Australian corporate borrowers. 60% to 70% of the capital is invested in the Metrics Credit Partners Diversified Australian Senior Loan Fund, 20% to 30% in MCP Secured Private Debt Fund II and 10% to 20% in MCP Real Estate Debt Fund.
Through the underlying funds, MXT has exposure to approximately 336 individual investments. 32% are from real estate, 23% are real estate investment trusts and diversified financials comes in third with 8%. The average credit quality of the loans is BBB, with 44% being sub-investment grade. Loans are of short term (average 1.6 years), with the interest rate being repriced every 30 days.
MXT’s return to investors over the last 12 months to 31 May has been 8.22%. Over 3 years, 8.44% pa and over 5 years 6.86% pa. It is currently distributing at a rate of 8.2% pa (paid monthly).
As interest rates fall, MXT‘s return will also fall as the loans are repriced (on average) every 30 days. But it should be largely in accordance with the change in the RBA cash rate.
MXT has a “highly recommended” rating from Zenith. A $2.5bn fund, it is trading on the ASX around $2.00 per unit, bang on its last NAV (net asset value) of $2.0069.
- Qualitas Real Estate Income Fund (QRI)
QRI focuses on a portfolio comprised of commercial real estate (CRE) loans that are secured by both first and second charge mortgages. This strategy gives investors exposure to a diversified basket of real estate–backed loans.
The $974m fund targets a return of the RBA cash rate plus 5.0% to 6.5% (net of fees and expenses).
Similar to MXT, QRI invests in a sub-trust which then invests in loans or other Qualitas funds. On a “look through basis, the current investment portfolio has 50 loans, with 87% described as “senior” and 13% “mezzanine”. All are floating rate (that is, the interest rate resets every 30 or 90 days), with a weighted average loan term of 1.0 years. The bulk of the loans are for residential property (commercial and industrial make up 28% and 9% respectively) and have a weighted average LVR (loan to valuation ratio) of 66%. QRI says that as at 31 May, it had no interest arrears or impairments.
QRI’s net return for the year to end May was 8.35%, below its target return of 9.27% to 10.77%. Its 3-year return is 8.25% pa and since inception in November 2018, 7.18% pa. QRI is currently distributing (monthly) at 7.6% pa.
QRI has a “recommended” rating from Zenith. It is trading on the ASX around $1.60, again bang on its last NAV (net asset value) of $1.6048.
- Macquarie Income Opportunities Active ETF (MQIQ)
The Macquarie Income Opportunities Active ETF (MQIQ) offers a slightly different proposition to the income-seeking investor. This ETF is designed to provide exposure to a diversified fixed income portfolio that spans various credit instruments. Its central focus is on outperforming the Bloomberg AusBond Bank Bill Index over the medium term and provide higher income returns than traditional cash.
A class of the $2.9bn Macquarie Income Opportunities Fund, it provides exposure to a wide range of domestic and global investment grade floating and fixed rate instruments, asset-backed securities, and cash. The Fund may also have opportunistic exposure to other fixed income sectors and instruments such as high yield and emerging markets debt.
MQIQ’s portfolio has an average credit rating of A, with 27.2% rated AA or better and 27.3% BBB. Only 9% are sub investment grade. The fund has a longer interest rate duration of 3.1 years, with a portfolio yield to maturity of 4.7%.
MQIQ’s net return for the year to end May was 7.02%. Its 3-year return is 4.68% pa and 5 years is 2.82% pa. MQIQ is currently distributing (monthly) at approximately 4.25%. pa.
- Gryphon Capital Income Trust (GCI)
GCI focuses on Australian residential mortgage-backed securities (RMBS) and asset backed securities (ABS). It’s a niche but relatively stable segment of the credit market. The trust aims to deliver monthly income with capital preservation, and it’s often viewed as a lower-volatility option within the credit fund universe.
It targets a return of the RBA cash rate plus 3.5% pa.
The $1.1bn fund has 149 bond holdings that securitise residential mortgage loans, car loans, consumer loans and SME property loans. Some of the loans are “non-conforming”, that is mortgages which would not normally be written by a traditional prime lender and are not eligible for lender’s mortgage insurance. Ratings on the bonds vary from AAA to B, with an average credit rating of BBB. About 27% are sub investment grade. Like the underlying loans, the bonds reprice as interest rates change (i.e. they float).
GCI’s net return for the year to end May was 7.02%. Its 3-year return is 8.41% pa and 5 years is .7.11% pa. GCI is currently distributing (monthly) at approximately 7.90% pa.
GCI has a “recommended” rating from Zenith. It is trading on the ASX at $2.03, marginally higher than its last NAV last NAV (net asset value) of $2.0141.
