by Rob Hosking
Last week ASB Group Investments released a warning about some finance companies offering debentures.
FundSource – which raised similar concerns last year – says that such investments have their place but the trick is ensuring investors understand what they are taking on. Investors see two main advantages of such investments - a certainty of return because a rate is quoted, and higher returns than from other fixed interest investments.
“However, the risks are often not considered fully in comparison with alternatives like managed funds. Often the only thing compared is the return, with the investor not realising that the underlying assets are totally different and it is like comparing apples with oranges.”
Differences generally include greater diversification in fixed interest managed funds, whereas finance company debentures – “particularly those lending significantly to property development, which may, for example, be highly concentrated geographically”.
There is also usually a lower credit risk in a fixed interest managed fund, and – commonly – greater liquidity.
“Finance companies and bank term deposits often charge penalties if you need to access your funds before the end of a fixed term.”
None of this means finance company debentures cannot be a valuable part of an investment portfolio, FundSource says.
“Unfortunately, for the average investor it is very difficult to identify and assess these risks, and as such they may either not take them into account, or avoid high-quality investment because of the lack of information.”
Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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