Fixed interest investing

When you think about it this is quite big growth compared to what has been experienced in the managed funds area.

KPMG chairman Andrew Dinsdale says that many investors are attracted to this area because of the ”safe nature” of those investments.

Investors can look at the ads see a promised return and expect to get that number. This is a very different scenario to putting money into a managed fund and not really knowing what will happen.

But the reality is the finance company sector is a bit like the cover of this month’s ASSET magazine. Underneath the surface there are some dangers lurking.

KPMG banking and finance group chairman Andrew Dinsdale says investors have little understanding of risk and how it is priced. And he queries some of the products currently on being sold to investors.

“The interest rates being offered by some finance companies, when you look at the Wednesday and Saturday newspapers, make you wonder a bit,” he says.

“One of the factors in the growth of the property market has been the growth in retail debenture market and they are offering nine, 10, 12% rates in some cases.

“I worry that some of the people investing in those products are not able to afford that sort of risk.”

Another of the observations from the KPMG report is that new finance companies continue to pop up all the time. While it is a very competitive market companies are still making money, and indeed the interest margin for the sector as a whole creeped up 22 basis points in the past year.

Dinsdale wonders, in this competitive environment, who much of the rate setting for deposits is based in competitive pressure, as opposed to risk pricing.

While Dinsdale has some concerns he is quick to add that he is not suggesting a failure of any of those firms is likely. (Although he does note these things go in cycles).

He is stressing that products offering that sort of return carry bigger risks than perhaps investors realise.

For the more experienced advisers in the industry it’s clear that mezzanine debt is the more risky than say second mortgage offerings. Likewise first mortgages are a safer option, and therefore have lower risk than second mortgages.

Dinsdale says it is hard to assess risk as there are a number of factors to take into account such as spread of assets concentration of assets and the amount of capital involved. It is the job of the professionals, such as financial planners and chartered accountants, to assess the risk of each offering before recommending them to their clients.

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