Investment basics

Before you consider your investment options it pays to understand not only the assets that make up your available options, but the relative volatility of those assets.

High volatility means that the value of an asset can change dramatically over a short time period, either negatively or positively. A low volatility asset's value tends to change less frequently and by smaller amounts over a period of time.

Generally growth assets have a higher degree of volatility, while defensive assets exhibit low volatility.

Growth assets

Growth assets are types of investments that have the potential to increase in value over the long term, but are also likely to experience higher volatility in performance from year to year.

Growth assets include:

• shares
• property
• unlisted equity
• infrastructure.

Shares

When you buy shares you are actually buying part of a company. The investment return will depend on how the company performs over time, economic factors and investors’ views of the company.

By investing in international shares, you are investing in companies based in different countries, which may assist in reducing overall volatility of your total investment portfolio by spreading risk across a range of investments.

International share investments may also be subject to currency movements which can add to, or take away from, the share investment returns.

Historically, and over the long term, returns from shares have tended to be higher than those achieved by property, fixed interest and cash. However, over shorter periods, the value of shares can change dramatically.

Property

Buying office buildings, shopping centres, industrial estates and other similar property investments is known as direct property investment. Investors can also buy units in property trusts which, in turn, buy a variety of properties. These trusts may be listed on the Australian or international securities exchanges or they may be unlisted.

Like shares, property investment is suitable for long term investment as it has the expectation of growth in value, although returns can be volatile. 

Unlisted equity

Unlisted equity investments (also known as private equity) are investments in shares in companies that are not traded on the share market.

The Fund invests in unlisted equity through venture capital funds (offering interests in private businesses in their early stage of development), buyout funds (offering interests in more established companies with positive cash flow) and mezzanine funds (offering interests in companies just before they are publicly listed).

The Fund has chosen to minimise the risks involved in unlisted equity by investing in funds that specialise in this sector. These funds take large stakes in unlisted equity investments, and take an active role in monitoring and advising the private companies in the portfolio.

Infrastructure

Infrastructure funds give investors exposure to a professionally managed portfolio of infrastructure assets such as:

• toll roads
• airports
• communication assets like broadcasting towers
• rail facilities and other transport assets
• utilities such as electricity power lines and gas pipelines.

Infrastructure funds are managed by specialist fund managers who make all the investment decisions.

Returns from infrastructure funds have a combination of capital growth and income. The income generated by infrastructure assets is expected to be fairly predictable as these funds operate in environments with low levels of competition and high barriers to entry.

For growth orientated funds, the absence of stable income in the near term is expected to be compensated by capital growth in the medium term. On the other hand, some infrastructure funds have more mature assets that are generating steady income streams. The Fund invests in both income-orientated assets and growth-orientated assets.

Defensive assets

Defensive assets are types of investments used when trying to protect assets against the chance of a negative return (in other words the value of assets falls).

Defensive investments tend to produce lower long-term, but more stable, returns than growth investments. Defensive assets include:

• fixed interest
• cash
• absolute return funds.

Fixed interest

Fixed interest investments are issued to investors by Australian and foreign governments, semi-government authorities and companies in return for cash.

Interest is paid to investors over the life of the investment, usually at a fixed rate. These investments can generally be bought or sold before they mature, potentially resulting in capital gains or losses.

Fixed interest investments have a relatively low level of volatility compared to shares and property, but with a lower expected return in the long term. Over shorter periods, returns can be negative, particularly in situations where interest rates rise significantly.

Cash

Cash includes short term, interest bearing investments. Generally, the likelihood of losing the initial investment in cash is minimal and volatility is low. Investment returns are likely to be lower than those available from fixed interest, property and shares over the long term.

Absolute return (hedge) funds

Absolute return funds generally aim to produce returns in both rising and falling investment markets using techniques unlike those used by traditional fund managers.

Rather than the traditional buy and hold approach, absolute return funds have greater scope to use sophisticated trading strategies to benefit from opportunities in the market.

Although every fund is different, the underlying investments in an absolute return fund may include shares, bonds, currencies, options, futures, commodities, real estate securities, and other financial instruments and strategies.

While the risk profile of absolute return funds can range from very conservative to aggressive, the Fund only invests in the conservative fund of fund vehicles.
 

How much risk are you comfortable with?

All investments involve some level of risk, which is the chance that the return from your investment will be different from the return you expect.

Because some investment options are more volatile than others (depending on the mix of defensive and growth assets), having a choice of investment options helps you control how much risk you want to take.

Investing in defensive assets also carries potential risk over the long term — in particular, the risk that your super investment will not keep up with inflation.

If your super does not grow as fast as inflation, your super will lose its buying power and you may end up with less money than you will need in the future.