Generating income when rates can only go up, and doing so in an environment of recession or anaemic growth, is at best a pipe dream. The fact is that there comes a point at which trying to scrape a tenth of a yield by adding risk (and we are not talking about mere volatility but the dreaded insolvency) is not only reckless but also increasingly difficult to achieve. A few examples to illustrate this point: The Spanish 10-year sovereign bond, with government indebtedness of 100% of GDP and its persistent public deficit of -7%, offers an incredible yield of 1.96% per annum. Or the high yield corporate debt of companies in the developed world, as over-indebted as the countries, with yields that are less and less «high» and which will be mercilessly crushed by the rise in interest rates. And what can we say about Greece itself, the paradigm of insolvency and the impossible rescue by states also in need of a bailout, offering a ridiculous 7.79% for 10 years. In other words, the investor receives 7.79 per annum in exchange for Greece being able to pay back its euros intact in 2024... Insane. The sovereign debt that many investors have in their portfolios (ignoring the fact that there is life beyond traditional listed fixed income), which has risen as much as the Spanish risk premium has fallen in the last two years, reminds me a lot of the turkey sentiment before Christmas...
We are therefore faced with a scenario of developed stock markets that are expensive rather than cheap, and a fixed-income market with anaemic yields and a bleak outlook. And in this environment, we are left with just two options for achieving attractive returns in the medium to long term. One is the stock markets of certain emerging economies, where growth is still present, although their volatility may be too much for the faint-hearted and for investors seeking short-term returns. The other option is to lend our money in return for the repayment of the principal plus interest, whilst remaining insulated from the impact of rising interest rates and their effects on the prices of traditional fixed-income bonds. That’s no small matter.
The million-dollar question is: how can we invest our money in a diversified and sound manner, in return for substantial returns that are not eroded by rising interest rates? It has taken us nearly a year and a half of searching and sifting through the world of investment funds across the globe to find the answer, but we can now say that we have identified more than half a dozen strategies that meet the aforementioned criteria. At first, we only had a couple of options, which meant the concentration of risk in terms of fund manager and strategy was excessive, but little by little we have been adding new funds that generate the desired returns whilst avoiding the risks associated with traditional fixed-income investments.
We now have seven very diverse strategies that enable us to achieve sustained returns of between 5% and 17% per annum. Among these, we highlight funds that lend money to US, UK and Australian companies via «bridge loans» (whilst the banks renegotiate their loans) for terms of between 30 and 120 days. Naturally, such short terms are unaffected by any rise in interest rates, and the fund manager retains control over the bank accounts into which the companies’ revenue is paid as collateral.
Another, entirely different strategy is to invest in the US mortgage market, where property prices have already bottomed out and are now on an upward trend; consequently, the underlying collateral increases in value every quarter, as does the value of those mortgages.
We are also lending our money to funds whose managers finance international commodities trading, through the chartering of ships and containers that are transported daily from one continent to another. Naturally, the collateral against any potential default consists of the company’s assets, as well as the chartered goods themselves.
Another strategy in which both we and our clients are investing is the purchase of life insurance policies from elderly people in North America who, for various personal reasons, are no longer interested in maintaining these policies. The discounts available on the death benefit premium vary, but they usually guarantee double-digit annual returns.
We also invest in funds whose managers they lend money to businesses and individuals (direct lending) in exchange for collateral that is not limited to mortgages, but also includes other corporate or movable assets. Or other funds that trade directly in commodities, purchasing non-perishable goods that they have already sold, and arbitraging price differences arising from market inefficiencies in certain regions of the world.
As you can see, these are very diverse strategies and funds, with monthly or quarterly liquidity, but which, unfortunately, are not registered in Spain for sale through the Spanish retail banking channel (or funds referred to, somewhat disparagingly, as «plain vanilla» amongst industry professionals). These are strategies and funds to which only qualified – and well-advised – investors have access, as they require investment vehicles that defer taxation so that they offer the same advantages as the typical funds sold by your local bank. The good news, as we have already explained in various previous articles, is that Any investor with at least 250,000 euros can set up their own investment vehicle which enables you to invest in strategies reserved for qualified investors, or Qualified Investors (QI).
Today, more than ever, investing as qualified investor at an international level, without any funding constraints plain vanilla sold in Spain, this is essential if we are to prevent the slow demise of the traditional rentier. Christmas is approaching, and the turkey, though plump and content, has its days numbered.