Investments

There are many investment vehicles which may be used to build wealth. Whether it be investing in cash, shares or direct property the team at M&A Wealth are experienced in assisting you to build your wealth.

Different investments offer varying levels of risk and volatility. Risk can be defined as the potential for an investment to achieve a lower return than that which was expected at the time of investing. It is important for you to be comfortable and aware of the risk you are prepared to take with any investment.

Broadly speaking, investments can be grouped into primary categories; defensive investments and growth investments.

Defensive Investments

Defensive investments are generally less risk and less volatile.  They also have a reduced opportunity to provide a greater return.

Defensive investments have a place within a wealth creation strategy as they offer some security around the income that may be received.  They may also be appropriate for individuals that have shorter time frames before they require access to their capital.

Cash investments are the most defensive types of assets. This investment type generally has you ‘lend’ funds to Australian Government bodies, Banks and other Financial Institutions. These entities are the borrows of you funds. These ‘borrowers’ pay an interest income which usually rises and falls over time in line with short-term interest rates.

  • Transaction Accounts
    These are the everyday accounts that we all have and usually have our regular income deposited into.  They allow for you to hold your monies, spend your monies and transfer your monies for various reasons. Often they do not provide any benefit for holding funds within them such as interest.
  • Savings Accounts
    A savings account may offer a higher interest rate return than transaction account. They are also usually more tedious to get immediate access to which hinders that impulse purchase that you may want to make. With more money saved, you will be able to take that dream holiday or save the deposit for your first home sooner.
  • Bank Bills
    A bank bill is a defensive type of investment that has a fixed investment period, usually between 30 to 180 days.  This means for the period, you will be penalised if you wish to access your monies and any potential return on investment may be forfeited.  They also generally offer a better interest rate than savings account

Fixed Interest investments are also known as debt securities and they have a fixed rate of interest payable. Typically, an investor lends their money to an organisation, such as a bank, in return for a fixed return to be payable set at a future date. Fixed interest investments tend to be low to medium risk for Australian fixed interest and medium to high risk for international fixed interest (known as international bonds).

Some examples of cash type investments include:

  • Term Deposits
    Term deposits are investments that allow the individual to receive a return slightly higher than what a savings account would offer.  The limitation on this investment is that you will be penalized if you wish to access your monies and any potential return on investment may be forfeited.  The terms can be short (similar to bank bills) and may extend up to 5 years
  • Bonds
    Bonds again allow for an individual to receive a return on their monies at the limitation of access to the funds for an extended period of time.   They are slightly more risk than what is offered from cash and term deposit investments however offer greater income returns to compensate for the increased risk. Generally speaking public companies offer these investment vehicles in order to allow the business to fund future growth.
  • Hybrids
    Hybrids are an investment that have characteristics similar to both defensive investments such as term deposits and bonds and growth investments such as shares and managed funds. They offer income returns, generally higher than that of the other defensive investments.  This is because they are of greater risk than that of other defensive investments as they are higher up on the risk/return scale.Hybrids can also be traded on the Australian Stock Exchange (ASX) and because of this result in an increased volatility in their capital value.

Growth Investments

Growth investments generally have greater risk and are more volatile.  They also have a more opportunity to provide a greater return.

Growth investments have a place within a wealth creation strategy as they offer the ability to grow a portfolio over the long term and outpace inflation.  Longer time frames (5-7 years depending on the asset) are usually required to hold growth assets as this allows for a portfolio to ‘ride out’ short term volatility.

Shares are generally medium to high-risk investments. Purchasing shares is essentially purchasing part ownership of a company. The growth and income of a share is linked to the performance of the company over time as well as market fluctuations and economic and regulatory change which may influence the perception of a company’s value.

Given the level of risk associated with shares, investors generally need to be able to hold these assets for the medium to long term to smooth out volatility. Diversification also comes into play to manage volatility as different sectors and markets will perform in different cycles and react to different economic events. For example, a technology company may not be affected by severe floods in a specific region where a food company might be affected.

Income is generally received in the form of dividends, which are the company’s distribution of a portion of its profits to shareholders.

  • Australian shares
    Dividend income from investment in Australian companies can have tax benefits under the dividend imputation system. Australian companies pay tax on profits. When these profits are distributed as dividends they are often issued with franking credits for the taxes already paid. These
  • International shares
    The share value and dividends of international shares may also be affected by currency risk (the risk of a change in the exchange rate). This can be mitigated by hedging against currency risk

The share value and dividends of international shares may also be affected by currency risk (the risk of a change in the exchange rate). This can be mitigated by hedging against currency risk.

Property is considered a growth type asset. Property is typically suited to investors who can hold the asset over a medium to long term.

  • Listed property
    Exposure to property investments may be gained by purchasing shares in a listed property trust. The property trust will invest directly in property (either commercial or domestic) and investors purchase units in the property trust.Listed property trusts act like a share investment as the trust itself is listed on the stock exchange and are therefore subject to fluctuating market sentiment like any share. A major benefit of a listed property trust is liquidity, as the shares can be sold to a ready market at any time.
  • Direct property
    Direct property is a ‘real property’ asset and generally includes land and buildings on it such as a house, apartment, shop or factory. If the property is tenanted, income may be received as rental payments.While still subject to market sentiment and economic influence, direct property tends to display less volatility as prices are not updated daily. For this reason, some investors feel more comfortable holding property compared to a share portfolio.Direct property is an illiquid asset and has higher upfront costs (such as inspection reports, legal and conveyancing fees, loan establishment costs and stamp duty) compared with shares or listed property.

Investment vehicles

From the four basic asset types detailed above (cash, fixed interest, shares and property) a portfolio of investments can be established. There are several ‘vehicles’ which can be used to hold assets and these vehicles offer different advantages and disadvantages.

A managed fund is a professionally managed investment portfolio.  The managed fund is a type of unit trust with the trust owning the underlying assets. Individual investors receive ‘units’ in the trust proportional to the funds contributed.

The fund manager will choose a portfolio of investments based on their objective for the fund. The objectives or aim of a fund will generally dictate the asset allocation (the portion of assets selection from cash, fixed interest, shares, and property) and the style of the fund manager (active or index).

Some managed funds operate as multi-manager funds – where they hold a portfolio of other managed funds rather than a portfolio of direct assets. Multi-manager funds offer asset diversification as well as investment manager diversification.

Managed funds can be useful for investors as they offer professional management, diversification and access to a wide range of assets including wholesale assets which are not generally available to retail investors.

As the trust is the owner of the underlying assets any tax benefits (such as franking credits) and liabilities (CGT) are applied to the trust itself and not managed individually. This can be significant for new investors as there is no way to know if they are inheriting embedded tax liabilities for gains they did not receive.

LICS operate similarly to a managed fund whereby investor funds are pooled to create a professionally managed investment portfolio. Furthermore, the LIC owns the underlying assets. Unlike managed funds, however, LIC are traded on the stock exchange and investors purchase shares in the LIC.

As LICS trade on the stock market, they may trade at more or less than the value of their net underlying assets (net tangible assets or NTA). This means investors may purchase shares in a LIC at a discount to the NTA (e.g. purchasing for $1.00 when NTA is $1.10 means an extra 10 cents growing and providing income) or at a premium to the NTA (e.g. purchasing for $1.00 when NTA is $0.90 means returns need to be 10% greater to cover the purchase premium). This can also mean the price available upon disposal of shares in a LIC may have an impact on overall effective performance.

As the company owns the underlying assets, like managed funds, LICS may have an embedded capital gain. However, as tax is paid at the company level franking credits may be available for investors on gains distributed as dividends.

An exchange traded fund is a security that represents a basket of shares (like a managed fund). This means, like a managed fund, it provides investors with the advantages of diversification and professional portfolio management.

Like LICS, ETFs are also traded on the stock exchange, however, they differ to LICS in that there is a ‘market maker’ so investors buy and sell at the value of the underlying investment.

Since ETFs trade like shares, they can be bought and sold throughout the trading day. Investors do not need to request a redemption and wait for funds to be received.

Managed accounts are investment portfolios where the investor maintains direct ownership of the underlying assets.

Managed accounts may operate as a separately managed account (SMA) whereby the investment manager offers a model portfolio/s or an individually managed account (IMA) where the investment manager suggest a core portfolio of stock but tailors the portfolio to the investor’s objectives and tax position.

As the investor owns the underlying asset they are generally able to in-specie transfer the underlying assets to a different investment manager without being forced to sell down assets and incur tax events and potential time out of the market.

The assets in a managed account are not pooled, so the actions of other investors have no effect on investors in a managed account.

Investors in a managed account tend to have greater transparency and the ability to achieve tax efficiency as changes in asset holdings can be tailored to the individual (e.g. selling parcels of shares held for longer than 12 months to benefit from CGT discount).

Build, manage and protect your wealth

In order to properly assist you in achieving your goals and objectives, a financial strategy must not only help assist in building wealth, it must also protect what you currently have. The most effective method of protecting your assets is through risk management strategies such as insurance