ASIC issues income stream warning

The Australian Securities and InvestmentsCommission (ASIC) is warning individuals considering investing in income stream products to be particularly wary of debentures, unsecured notes and other interest-bearing investments offering higher than usual returns.

“Investing in high-yielding company debentures is vastly different from a term deposit or even managed funds,” ASIC director of corporate finance Richard Cockburn says.

According to Cockburn, in 2003-04, ASIC had to step in and freeze more than $1.8 billion in debenture fundraising until companies amended prospectuses to ensure the offerings were suitable for investment.

“This is not acceptable. These investments were being offered to the public, often targeting retired people who place a high value on the safety and security of their money,” he says.

ASIC is warning investors, particularly retirees seeking income from their investments, to be careful and not “put all your eggs in one basket”.

“It’s a do-it-yourself strategy where you or your adviser must understand the risks you’re taking and the quality of the companies you’re investing in,” Cockburn says.

The peak regulator warns investors that higher returns mean higher risk.

“Returns of even 1 to 2 per cent more than the going market rate signal higher risk, so you or your adviser must go through the prospectus with a fine-toothed comb.”

ASIC says company debentures are only as good as the company that issues them, and that while some companies may get independent ratings agencies to assess the quality of their securities, they are not required by law to do so.