In this low-rate environment, finding income-generating investments can be challenging. A mortgage trust or diversified income fund could help bridge the gap left by traditional asset classes.
Interest rates have dwindled to an all-time low, forcing investors who rely on traditional deposit products to watch their interest income decrease to almost zero.
Blue-chip shares have long been favoured for their regular dividends (particularly those paying franking credits), but even some of Australia’s biggest companies have deferred or cancelled their payments to investors during the last year.
Superannuation minimum drawdown limits have been cut, as funds recover from stock market turbulence.
Some retirees have opted for the simple but painful option of tightening their belts. Others have chosen to use their savings to supplement a reduced investment income, which increases the risk of running out of money later in retirement. Others still have released equity from their homes by downsizing or by using a reverse mortgage, both options that have inheritance implications not palatable to all families.
If these types of income worries sound familiar but you haven’t found a solution that works for you, it may be because you haven’t yet explored all of the investment options available to you.
Alternative investment income options
Trilogy offers two alternative investment income solutions designed to provide a competitive, regular investment income.
These products are called mortgage trusts and diversified income funds, and which one you may choose would typically depend on the amount you wish to invest, your risk appetite and your investment horizon.
Mortgage trusts – sometimes called mortgage funds – have been around for decades. Investments in mortgage trusts have grown by between 30 and 40 per cent over the past 12 months to more than $15 billion, according to SQM Research, which monitors property markets.
When you invest in a mortgage trust, your money is usually pooled with the money contributed by other investors. This pool of funds is then used to provide loans to borrowers, with the loan secured by a registered first mortgages against property provided by the borrower.
The borrower is usually associated with a property developer or building company that needs financing for a subdivision or residential, commercial or industrial property project, such as developing a residential housing estate or an industrial estate.
Mortgage trusts’ income sources may include proceeds from borrowers’ repayments, interest, fees and income from other investment holdings. Details around sources of distributions from mortgage trusts should be disclosed within an offer document.
It’s important for investors to be aware that all investments carry risk, including the risk of losing part or all of their capital or diminished returns. Mortgage trusts don’t offer the same level of capital security as some traditional deposit options, but the higher risk profile is reflected in the competitive returns offered by many mortgage trusts.
On the flipside, mortgage trusts aim to provide regular income without the same level of exposure to volatility that equities can entail. Mortgage trusts are medium-term investments according to Moneysmart, which means investors’ funds aren’t available at call, but neither are they locked up for a set term, with most trusts permitting partial or full withdrawals after a specified notice period.
Find out more about the our mortgage trust, the Trilogy Monthly Income Trust here.
Diversified income funds
Diversified income funds– sometimes called enhanced income funds – also pool investors’ money, but depending on the fund, invest in a range of cash, fixed-interest investments, and other financial assets, with the aim of generating a return that’s higher than a general market rate, such as the official cash rate set by the Reserve Bank of Australia.
The cash-style and fixed income assets held in such a fund can include government bonds, floating rate securities, term deposits, income securities and commercial bills of exchange. The fund manager might seek to further enhance the returns offered by the fund by investing a portion of the fund’s money in other higher-return, higher-risk financial assets such as, for example, mortgage-related investments, such as a mortgage trust.
Diversified income funds can offer a competitive rate of return, with the aim of paying returns to investors each month. Withdrawals are usually available after giving a period of notice, which can range from a number of days to weeks, depending on the fund.
Find out more about our diversified income fund, the Trilogy Enhanced Income Fund here.
Important things to note
As with all investments, there are risks as well as potential rewards associated with investing in a mortgage trust or diversified income fund. A licensed financial adviser can help you better understand the pros and cons of different investment types. We always recommend investors obtain, read and understand the relevant offer documents and seek advice from a licensed financial adviser before investing.
Want to learn more about Trilogy’s range of mortgage trusts and diversified income funds that all share the common goal of providing income-focused solutions?
This article has been prepared by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) as responsible entity for the Trilogy Monthly Income Trust (Trust) ARSN 121 846 722 and Trilogy Enhanced Income Fund (Fund) ARSN 614 682 469. Application for investment can only be made on the application form accompanying the Product Disclosure Statement (PDS) dated 17 December 2018 for the Trilogy Monthly Income Trust (Trust) ARSN 121 846 722 and 28 July 2020 for the Trilogy Enhanced Income Fund (Fund) ARSN 614 682 469 available at www.trilogyfunds.com.au. The PDS contains full details of the terms and conditions of investment and should be read in full, particularly the risk section, prior to lodging any application or making a further investment. All investments, including those with Trilogy, involve risk which can lead to loss of part or all of your capital or diminished returns. Trilogy is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed.