• Klaus Meitinger

Rethinking interest rate investments.

Lerbach DSF1819Income. Secure interest rate investments will not yield a return for years to come. For investors seeking adequate returns with reasonable risk, broad diversification across a range of alternative investments is the solution.

"We will now have to live with extremely low interest rates for much longer than previously thought," assumes Kai Röhrl, Robeco. As a result, safe government bonds will probably remain an anchor in the portfolio for a long time. So we have to find alternatives for this part of the portfolio. And that's where more and more creativity is required."

This is a case for the earnings workshop. "Bunds have not only provided attractive current yields in recent decades. They were also liquid, hardly fluctuated in value and thus provided a valuable contribution to diversification in the portfolio", Thomas Neukirch, HQ Trust, opens the debate and states: "There is no single asset class that still offers all this today. Rather, investors must always accept one disadvantage or another. "For example, if you want returns and sufficient liquidity, you have to live with higher fluctuations in value and a stronger correlation to the equity component," notes Ulrich Voss, Tresono. "Or they can do without tradability in favour of von Rendite and accept that they cannot get their money at all times," adds Thomas Neukirch.

The entire interest-bearing area of the portfolio must therefore be rethought today, concludes Röhrl:  "It is a matter of combining liquid fixed-interest securities, illiquid strategies, alternative investments, real estate and specialities in such a way that a block is created which - depending on the situation and personal risk appetite - still offers diversification and a reasonable risk/reward ratio even in a zero-interest world.

// 01 Liquid fixed income securities.

"If you want to generate returns, you have to take greater risks with bonds," explains Michael Gollits, von der Heydt, "and that means either cutting back on the creditworthiness of the debtor or accepting currency fluctuations. "For those who are aware of this, government bonds from emerging markets offer an interesting alternative. Depending on their credit rating, they offer three to five percentage points more than German government bonds," says Gottfried Urban, Urban & Kollegen, and continues: "We do this primarily with hard currency bonds issued in euros or dollars, and only to a small extent with bonds in the respective local currency. The yields there are much higher, but the risk is also much higher.

"In corporate bonds - another popular variety - yields are already strongly converging. Investors find a reasonable relationship to risk with debtors whose creditworthiness is on the borderline between investment grade and high-yield," Urban considers (lesen Sie also see page 78). Ulrich Voss also considers senior loans, senior secured corporate loans - implemented by experienced active managers - and inflation-indexed bonds (TIPS) to be interesting: "The former offer interest rates between 3.2 and 4.2 percent. And the latter convince me because they diversify the portfolio". After all, the biggest risk of investing in bonds is that inflation rates and therefore yields will rise. Because then their prices fall. "In TIPS, the coupon and redemption rate rise with the rate of inflation. They are therefore immune to inflation," explains Ulrich Voss.

"We are also looking around in the Asian high-yield sector," Gollits combines both investment ideas, "there are high-quality companies whose bonds are broadly diversified and yield between 5.5 and six percent per annum. And even if I then spend another percentage point on currency hedging, that's not much less than is to be expected on the stock market in the long term. I find that lucrative."

"But the key to all these ideas is not to take individual risks, but to spread them widely via active funds or ETFs," Gottfried Urban makes clear.

// 02 Alternative investments.

One interesting investment opportunity is microfinance. "These are mini loans that are granted to small entrepreneurs - primarily in developing and emerging countries. This is a completely different asset class because it is hardly subject to interest rate risks and success depends on how good the credit check is," says Urban.

Another alternative could be catastrophe bonds, so-called cat bonds. "Deren Charme is that the prices develop independently of the economy or stock markets. Das Investment performance depends solely on the amount of damage caused by the insured natural disasters," explains Urban. "It's just difficult to get the risk side under control. Deshalb I advise a broad diversification. The convincing thing is that insurance premiums are rising there. "Such securities should yield two to four percent and, due to the tendency towards fat tails, should not only be diversified but also invested with a long investment horizon," adds Neukirch.

The professionals are also not ignoring the hedge fund sector, which has been much maligned in the past. "Many have not kept what investors expected of them - stable returns that are independent of market trends," Neukirch analyses, "but from a set-up point of view they can deliver uncorrelated returns. Die The only art is to find capable managers. These can also be part of the solution."

// 03. Real estate.

"In view of the Corona pandemic, investments in real estate require a strict analysis of locations and types of use," advises Gollits. "I already think that the demand for office space will decline in the future in view of the trend zum Homeoffice. At the same time, retail properties, including those in inner city locations, could come under pressure". "They are suffering from the increased use of online trading," explains Voss. "There is also a risk that sales will shift if more people now work from home and fewer commute to the city centres", ergänzt Urban.

On the other hand, Ulrich Voss clearly sees logistics centers as the winners. "Due to the booming online trade, they are the beneficiaries of the current development."

Hardly any effects are expected on the housing market, however. "We do not expect prices and rents to fall, especially in the core locations. Sie should continue to develop in a stable manner," says Neukirch.

Housing and logistics should therefore be the focus of direct investment im Vordergrund. "And those who rely on funds must first check where their investment focus lies," explains Neukirch. "Reasonable net rental yields can, however, in view of increased prices, only be achieved by high levels of debt financing - admittedly at extremely favourable conditions", adds Gollits, "the risk associated with debt must be taken into account in all real estate investments".

"Real estate stocks can also be interesting," adds Voss. "They offer stable distributions and are now almost a kind of interest substitute." Another way to invest in the real estate market is mezzanine capital. "These are hybrids of debt and equity. Investors generally have control and information rights, but they forego the opportunity to intervene in the operating business. Die Maturities are usually between eight and 48 months," informs Gollits, but also warns: "This is a professional business. The creditworthiness of the respective project developer is decisive. Die investors should take a very close look".

// 04. Illiquid alternative investments.

Among these, the professionals summarize unlisted investments in Beteiligungsstrukturen, which usually cannot be sold during the long term of ten to zwölf Jahren. "Opportunities include investments in infrastructure facilities - roads, mobile phone masts, fibre optic lines, server farms - anything that generates regular income," explains Michael Gollits. The challenge: "There is nothing for free here either. If the regular yields are below three percent, I'd rather not do it, because return and risk are not in balance," says Ulrich Voss.

Another illiquid alternative is private debt, also called private lending. This involves direct loans to mostly medium-sized companies or for financing real estate and infrastructure projects. "This is exciting because investors can still receive yield premiums of between 2.5 and five percent here, depending on the structure," says Gollits. "But since this asset class is very complex and credit risks are decisive, investors should only invest broadly diversified via funds," advises Neukirch.