An alternative to cash and bank hybrids for income-seeking investors

Please note this interview was filmed 15th May, 2025.

As interest rates begin to soften and volatility lingers across global equity markets, investors are increasingly searching for reliable sources of income without high risk.

According to Helen Mason, Portfolio Manager at Schroders Australia, the answer may lie in an often-overlooked corner of the market: Australian corporate credit. 

“Australian credit is probably, in my view, one of the best asset classes in Australia today," Mason says. 

In this interview, Mason explains why, and goes in depth into how the Schroders’ Australian High-Yielding Credit Fund (CBOE: HIGH) works. 

For the full experience, watch the video above. 

Investing across the capital stack

Mason explains that the fund focuses on well-known companies issuing into the Australian debt capital markets, such as Sydney Airport, Port of Melbourne, and Woolworths.

“We can buy their senior secured bonds all the way through to subordinated or junior subordinated bonds. So what that means is that we still, in the event of a default, we rank above equity.”

That position provides investors with protection compared to equity investments, while still generating compelling returns.

"Essentially you're taking less risk than equity, but you're still getting very compelling yields," Mason says.

The fund’s holdings span both financials (e.g. CBA, Westpac), and non-financial corporates, with diversification across sectors and issuers.

The fund also taps into “Kanga issuers” which are offshore companies investing in the Australian credit market, using Australian dollars.

"So the fund itself is fully hedged back to Australian dollars. You're not taking any currency risk, but we're getting that broader opportunity set. And today the available opportunity set is around $340 billion." 

Rates vs returns

The fund aims to deliver 2.5%–3% above the RBA cash rate, before fees. So how does the rate cycle affect the investment opportunity set?

Mason explains, that unlike cash or term deposits which fall sharply in a rate-cutting cycle, the fund benefits from the credit risk premium - the additional return offered by corporate borrowers.

“Even if the cash rate falls, you're still attracting that credit risk premium on top of the cash rate. And so that's how we are able to achieve returns through the cycle.” 

By investing across investment-grade and sub-investment grade credit, the fund can adjust its exposure to suit prevailing market conditions while aiming for stable returns.

What kind of investor is the fund for?

For investors looking for steady income over weathering the volatility in equities, Mason believes the fund presents a compelling proposition.

“The fund itself is delivering 6% at the moment, distributions on a monthly basis, so [it’s for] investors who are looking for income.”

Mason says to think about it as an alternative to cash or term deposits as we see the cash rate continue to decline - but that it’s also for investors who are concerned about the volatility taking place overseas and how that's playing out in the Australian equity markets.

The fund is also designed to offer daily liquidity, a feature that distinguishes it from other yield-focused investments like private debt or structured credit which can present liquidity challenges in markets under stress or behaving abnormally .

We've never had any problems with liquidity in the fund...the unit trust has been running since 2001. So liquidity is really important to us and how we manage the fund."

Available in two formats, as both a unit trust and a listed ETF known as HIGH (CBOE:HIGH), the fund can be traded daily.

We're very focused on allowing investors to have access through the ETF, but also liquidity, and so the function to make choices when they want to make those choices.”

A real alternative to bank hybrids

With traditional bank hybrids being phased out, Mason positions the Schroders fund as a smarter, more flexible alternative.

“It's better than bank hybrids because with bank hybrids you're investing in one security through time. The high-yielding credit fund has actually outperformed the CBA PERLS over time.”

Backed by Schroders’ global credit research team, the fund can shift into better-value names and avoid crowded trades, such as those tied up in a single issuer.

The Australian credit “sweet spot”

While Mason acknowledges “safe is a tricky word, right?”, she says that while equity investors would have experienced a lot of volatility recently, "one of the things about Australian credit is it does have lower volatility than the equity market, but you're still getting very strong valuations.”

“We can experience drawdowns in the fund, but what we can do at the same time is present tactical overlays into the fund.”

Working alongside Schroders’ multi-asset and fixed income teams, Mason and her colleagues adapt the fund’s positioning in response to changing conditions:

“We can take risk off the table when we think that things [are] going into a period that is potentially more volatile…at the same time we can run hard into opportunities when we think markets are actually going to be running strong.”

If you’re looking for an alternative to term deposits, cash, or hybrids — and want to retain control, income, and flexibility — this fund might be worth a closer look.

Key summary:

• Target return: 2.5–3% p.a. above RBA cash rate (before fees)
• Current yield: ~6%, paid monthly
• Liquidity: Daily (unit trust and ETF format: ASX: HIGH)
• Strategy: Diversified Australian and global corporate credit
• Minimum holding: None for ETF; varies for unit trust

ETF

Schroder Australian High Yielding Credit Fund - Active ETF (HIGH)

Australian Fixed Income

View