Interview Transcript:
Nadine Blayney:
With global tensions pushing oil prices higher and inflation risks resurfacing, many pre-retirees are wondering what it means for interest rates and the reliability of their income streams.
To help us unpack it all, we’re joined by Michael Frearson, Head of Fixed Income at Real Asset Management. Welcome, nice to have you here.
Michael Frearson:
Thank you. I’m glad to be here, Nadine.
Nadine Blayney:
Okay, so let’s start with the global picture, because clearly there is a lot happening. It’s hard to even keep up with the headlines.
If I’m sitting here as an Australian retiree, what does it mean for me?
Michael Frearson:
Yeah, well, there is a lot happening in markets right now. That was a good summary earlier from Christopher Kent from the RBA.
Effectively, we’re in the middle of a supply shock with oil due to geopolitical tensions. That’s resulted in a big change in inflation expectations. People have seen that in petrol prices, but it will gradually flow through to other goods. That’s why central banks have needed to raise interest rates.
Additionally, from an investment perspective, there’s been a big increase in risk premiums. Equities have been volatile, and credit spreads in publicly traded securities have also been volatile. So overall, there’s been a big increase in risk aversion weighing on markets.
Nadine Blayney:
Yeah, so the risk aversion is real, we feel it every day across different asset classes.
But one key concern is inflation expectations becoming embedded and affecting interest rates. How do you see this playing out?
Michael Frearson:
That’s exactly why the Reserve Bank of Australia increased the cash rate to 4.1%. They had already raised it earlier from 3.6% to 3.85% due to domestic demand pressures. But given the supply shock, they moved again quickly.
The market is currently pricing in another two to three rate hikes this year. We don’t expect three, but we do expect at least one, likely in May, and possibly another in August.
However, it’s very hard to predict what will happen in the Middle East. If things settle, we may not need that second rise.
Nadine Blayney:
Right, because that would ease fuel prices.
There’s a lot of uncertainty, and it’s affecting everything, from bond prices to term deposit expectations. So, what does this mean for pre-retirees?
Michael Frearson:
From a fixed income perspective, a “higher-for-longer” rate environment can actually be positive for income investors.
If you’re invested in floating rate income streams linked to the cash rate, like term deposits or floating rate credit funds, you benefit from rising rates.
These can be relatively stable, depending on what they invest in. But there’s a wide range of options, so it’s important to understand your exposure to interest rates and credit risk.
Nadine Blayney:
And not all credit funds behave the same. What tends to struggle in this volatile environment versus what holds up better?
Michael Frearson:
Recently, even high-quality government bonds have struggled. In times of rising rates, they don’t always provide diversification.
Public credit spreads have also increased because they’re correlated with equity markets. So traditional fixed income hasn’t performed well.
Nadine Blayney:
So where does RAMHA fit into this?
Michael Frearson:
RAMHA is an ASX-listed security: RAM Secured Income Notes.
It’s a senior secured note designed to pay investors monthly income, with a maturity of around five years. It’s backed by a high-quality portfolio of secured home loans.
We think it’s attractive because it’s floating rate, secured, and has a defined maturity, so investors know they’ll get their capital back.
Nadine Blayney:
So, would you say it’s more defensive?
Michael Frearson:
Yes, very much so. It has strong structural protections, including $10 million in loss protection.
The portfolio consists of around 7,000 Australian residential mortgages, and it has historically performed better than major banks.
It also pays a 3% premium over the cash rate, so as rates rise, income rises: helping offset cost-of-living pressures.
Nadine Blayney:
And it’s purely Australian housing exposure?
Michael Frearson:
Correct. It’s 100% Australian, 100% senior secured mortgages.
Unlike peers, we don’t invest in offshore assets, corporate lending, or property development. It’s a simple, transparent structure.
Nadine Blayney:
Alright, so for pre-retirees watching right now, facing uncertainty, rising oil prices, and cost pressures, what’s the key message?
Michael Frearson:
The key message is don’t panic during volatility.
If you’re concerned, speak to your adviser. But also consider adding more defensive, uncorrelated investments to your portfolio for stability, such as RAM Secured Income Notes.
