Understanding investment portfolios in 5 minutes - Part 2
Tags: super, investments, asset allocation, returns
In our last blog, we talked about the high level asset allocation of our 5 model portfolios, between growth and defensive assets. This week, we thought we’d share with you a bit more detail about each of the investment options within these asset classes, and what they actually mean – because let’s face it, there is a lot of jargon in the financial services industry!
A lot of people think that investment portfolios are limited to investing in shares on the Australian stockmarket. But there are lots more investment options than just domestic shares.
The Super Fund Co.’s portfolios are invested in a range of asset classes, including:
Cash |
Money in the bank! This is considered the safest investment class, as your funds are available when you require them. But because it’s low risk, the rate of return is not as high relative to other investments. The investor usually obtains an interest rate through a bank or financial institution at or around the Official Cash Rate set by the Reserve Bank. The Official Cash Rate currently sits at 2.25%. |
ASX listed companies |
Companies listed on the Australian Securities Exchange (ASX) – such as ANZ, Woolworths, and BHP. You can purchase shares in these companies either directly, or via other tools such as managed funds (see below). |
Listed Property Trusts (LPT’s) |
A variety of property investments that provides you with exposure to a wide range of property types that are listed on the ASX - such as residential, commercial, office, retail, and industrial property. An example is the Westfield Group’s LPT. |
Managed funds |
A fund with a number of individual investors, whose money is pooled together to purchase investments across a range of asset classes and markets (ie. shares, bonds, property assets etc). This is managed by a professional funds manager. Pooling your money with other investors means you can collectively increase your buying power. It also means that one transaction can access a range of investments, which helps spread risk. |
International managed funds |
As above, however provides the investor with exposure to different overseas markets (i.e. US, Japan, Europe). |
Listed Investment Companies (LIC’s) |
Just like a managed fund, except that they are listed on a market (i.e. the ASX in Australia, the NASDAQ in the US etc). |
Exchange Traded Funds (ETF’s) |
These funds are listed on a market (ie. ASX) and can be bought and sold. They give investors exposure to a certain type of security, asset class or commodities – for example, there are ETF’s with exposure to the Gold index, the Australian Dollar or US dollar, or International investments. |
Bonds |
This is an IOU between the investor and the borrower. The borrower may be a company or Government, and it’s one of the ways they can raise money. The borrower pays the issuer a fixed or floating rate to borrow the funds: for example, Qantas may do a bond issue and pay investors 5.00% p.a. fixed to borrow funds, that they will then use to grow their business. Bonds usually have a fixed term (maturity) - i.e. 5 years. |
Hybrid securities |
Hybrid by definition is a combination of two elements – in this case, equity and debt. Hybrid securities usually pay a fixed or floating rate to investors for a certain timeframe, however usually with higher levels of risk than bond holders (and therefore usually higher rates of return). Investors may also be able to convert these type of securities into shares in the company at a future date. |
Fixed income |
Similar to bonds but may have a higher risk than bond holders if the company issuing the income securities becomes insolvent. They usually pay a fixed or floating rate of return over a specific period like hybrids. |
Each of The Super Fund Co’s portfolios typically has between 20 – 30 individual investments across these asset classes, depending on the risk appetite.
The reason for holding so many individual investments, and for spreading these investments out over the different asset allocations, is for diversification. Remember that saying “don’t put your eggs in one basket”? This is why! All investments carry an element of risk, even a deposit at the bank. By spreading your investments across different categories and individual investments, you can limit the impact of one investment on your whole portfolio – thereby giving you the best chance to mamimise your returns while minimising your risk.
As always, if you would like further information on any of the above or would like to understand more about The Super Fund Co.'s investment portfolios, contact us at any time. We love to talk super!
