The current financial crisis has claimed many victims in the managed investment industry, the most high profile of which have been Centro Properties and Babcock and Brown. During times like these it is interesting to reflect on what has caused some businesses to fail as, while the past is not always a good pointer to the future, it does provide lessons that should be heeded. The fallout of the current crisis offers very good lessons as to risk in business and investing.

Until recently it was common practice in the property fund sector, in particular, to make distributions from borrowed funds. This practice enabled the funds to offer attractive and tax affective distributions, however many relied on continued asset revaluations and income growing at a faster rate than interest costs. This practice relied on the continued availability of low cost debt and increasing revenue. The financial crisis has obviously had a negative affect as far as all three of these conditions are concerned. This strategy will almost certainly come back into vogue, despite the associated risks that have become so evident during recent times. The simple fact is that there are a large number of investors whose primary interest is distributions, and high yielding investments are relatively easy for product providers to market.

If you are an investor who relies on, or is particularly interested in, the yield of your investments please take note of the nature of the income streams that support that yield. A 10% yield today is not attractive if it is not sustainable, and particularly not if its payment puts your capital at risk.

Apart from the performance of their underlying investments, many investors have been affected by margin calls on their investments. This has put large numbers of people into the category of forced sellers. There are numerous stories of people who have lost large amounts on money on investments that have since regained significant value, because they have been forced to sell at the bottom of the market. Margin lending on individual shares will remain popular, despite the recently illustrated dangers of this form of lending as there remain many people who are impatient and/or are willing to gamble their wealth on the future strong performance of the stock market.

Out of crisis comes opportunity

For those who wish to gear into the share market, but want to avoid, the dangers of margin calls the managed fund industry can be expected to introduce a range of innovative products during the next 12 months. There is expected to be strong demand for products such as warrants and capital protected products in particular, which allow investors the opportunity to gear into a diverse range of asset classes with a long term view and limited risk from short term volatility.

Rebate Financial Services will keep you updated with information on new products as soon as they are announced.