Equities (shares) – Australian and international
Equities (shares) are a portion or share of a company that can be bought or sold on an exchange. Equities allow investors to access both large and small listed companies across a range of industries in Australia and overseas. The return investors receive from investing in equities includes income in the form of dividend payments, as well as capital gains (and losses) from changes in the value of the underlying shares, and for international equities, currency movements. Long-term returns from equity investments tend to be higher than those achieved from property, fixed interest and cash investments. But in the short term, their performance is more volatile and returns can be negative, making them a higher risk investment. Various factors like consumer sentiment, commodity prices and company performance can all have an impact on a company’s share price.
Note that our Australian and international equities asset classes can also include a small exposure to unlisted companies which are less liquid than listed companies.
Fixed interest (bonds) – Australian and international
A fixed interest investment is a loan issued by the Australian Government, the Government of a State or Territory of Australia, governments of a country outside Australia, or a large corporation, in exchange for regular fixed interest payments, plus repayment of the principal amount at maturity. It also includes investments in predominantly investment grade debt securities such as floating rate notes, corporate bonds, corporate loans and other short-term debt securities. Interest is paid to investors over the life of the investment, usually at a fixed rate.
While fixed interest investments such as bonds are usually less volatile than many other investments like shares, they may also have a lower expected return over the long term. In addition, it is important to note that fixed interest investments are not without risk and do not provide a fixed rate of return like a term deposit. The fact that bonds are traded in a marketplace with buyers and sellers like many other investment types means they are exposed to price movements, and the possibility exists for low or negative returns from time to time. Bond values are driven by prevailing interest rates and expected interest rate movements. In general, when interest rates rise, the market value of bonds tends to fall, and vice versa i.e. when interest rates fall, bond values tend to rise. This can have a significant impact on investment returns. Note that our international fixed interest investments will typically be 100% currency hedged, which means they are protected against the impact of currency fluctuations on investment returns.
Credit income covers a range of alternative debt investments. Like fixed interest, credit income investments involves a loan to a borrower in exchange for regular interest payments, plus repayment of the principal amount at maturity. However, compared to traditional fixed interest investments, the loans are typically to borrowers with a lower credit rating and, as a result, may command a higher rate of return to compensate the investor for the risk of default. Examples of credit income investments include loans to unlisted infrastructure and real estate companies.
Property investments include office buildings, shopping centres and industrial estates, as well as residential property such as apartment buildings and retirement villages. Investors can access property investments either directly or indirectly by purchasing units in a property trust (unlisted or listed).
Direct and unlisted property investment returns reflect a combination of rental income and capital growth, and are dependent on a range of economic factors such as interest rates and employment, as well as the location and quality of properties.
Listed property investments (often know as Real Estate Investment Trusts or REITs) are investments in their own right and their returns will also reflect changes in securities prices on listed markets, which will be different (and more volatile) than the returns earned from owning direct or unlisted property investments.
Property investments are subject to a moderate to high degree of risk and are typically most suitable for long-term investors seeking high growth over the medium to long term, who are willing to accept fluctuations in returns and the possibility of negative returns over the short term.
Infrastructure assets are the utilities and facilities that provide essential services to communities. Examples include utilities (electricity, gas, water and communications), power (including renewables), transport (airports, seaports, toll roads and rail) and social infrastructure assets (hospitals, education facilities and community infrastructure such as a convention centre).
New infrastructure sub-sectors which exhibit similar features to traditional infrastructure investments, for example land title registries, have also developed over time. Due to their scale and importance, infrastructure investments typically have high barriers to entry, but generally offer investors a steady income stream, potential for capital growth over the long term, and lower volatility than other growth assets such as equities. However, there are risks. For example, changes to government regulations, usage rates, and interest rates may affect their value. Similar to property, investors can access infrastructure investments directly by investing in individual assets, or indirectly via unlisted or listed pooled funds.
Alternative assets include a range of non-traditional strategies such as real return strategies and hedge funds. Unlike traditional fund managers, which are often restricted to investing in a single asset class (e.g. Australian equities), managers of these strategies have a wider range of allowable investments and are able to utilise a combination of equities, bonds, currencies, commodities and other liquid asset classes. They can make investments in these asset classes via physical exposures or, more typically, via derivatives. The managers we partner with to manage this asset class are selected either for their ability to provide strong diversification, or to deliver returns above CPI (or an official cash rate) by dynamically moving around their exposure to different asset classes. Many aim to provide positive returns when traditional asset classes experience negative returns.
Cash investments include a range of short and medium-term interest-bearing investments, such as term deposits, bank bills and treasury notes. Typically the least risky of all asset classes, cash is often chosen by investors who want to access their money in the short to medium term. However, while the risk of negative returns from cash investments is much lower than for other asset classes, expected returns are also lower. The buying power of your money may also be reduced as it may not keep up with inflation. The value of a cash investment can fluctuate due to a number of factors, but primarily with the rise and fall in interest rates.