Mark Lister, 17 June 2016

It’s about this time in the cycle that people start putting aside some of the usual investing rules and making less than prudent decisions.  The problems of 2008 seem a long time ago now, and even some of those who were impacted by the global financial crisis seem to have fading memories of those days.

Examples of how people are beginning to relax their standards include moves into syndicated investment schemes, and growing interest in putting money with non-bank lenders.

Neither of these options are necessarily bad investments. Some are, but others are reasonably sound. However, both are higher risk than traditional alternatives and people are showing greater interest because they are chasing higher yields. Sound familiar?

Of all the characteristics that people should seek in an investment, one of the least appreciated is for it to have “liquidity”. Liquidity is how easy it is so buy or sell something. Post-2008, many investors got stuck in various funds, property schemes and other illiquid syndicates that they couldn’t easily get their money out of.

Liquidity isn’t the only limitation of some of these vehicles. The property offerings tend to be undiversified, often being just one building in one city with one tenant. I’m not sure why an investor would choose this over a listed property vehicle with many buildings spread across the country, and lots of different tenants.

The listed property sector is currently trading on dividend yields around 6.5 per cent, so investors in the aforementioned schemes are only getting a small premium to compensate them for less diversification, less liquidity, and more risk.

We’re seeing similar behavior from those frustrated with low yields in the term deposit and fixed income market. The big banks have traditionally been the go-to for people looking for a low risk place to park their cash, while collecting a modest income stream.

However, with the interest rates on offer looking much less appealing than people would like, they have naturally begun looking further afield. This leads them to finance company-type entities, non-bank lenders and mortgage trusts.

Like syndicates and proportionate ownership schemes, some are better than others, but it’s pretty safe to say they are all higher up the risk curve than the banks

The cheapest place to borrow money will always be the banks, so that’s where those with the best credit go. The others look elsewhere, and pay a little more because they represent a higher likelihood of the lender not getting their money back.

That’s where the slightly better interest rates for depositors come from. When you deposit money with any financial institution, big bank or otherwise, it’s your funds they’re on-lending to their customers, so you’re taking on those risks.

The events of several years ago taught us many things, or at least it should have. A key one for a lot of New Zealanders was not to compromise your investment objectives for a measly extra one per cent a year.