AustralianSuper’s Post

"How to Invest in Different Parts of the Australian Yield Curve" Key Points: Superannuation funds are increasing their fixed income investments, reflecting a trend towards favouring bonds in the current environment. Bonds can help offset losses in other parts of a portfolio, such as equities and real estate, during a recession. The slope of the yield curve reflects the difference between yields on short-term bonds and long-term bonds. Investors can take a view of the slope of the curve and position their portfolios accordingly. VanEck is launching three new Australian government bond ETFs that will provide investors with a way to "play" the yield curve. https://buff.ly/3PQMVt7?

Theme: Risk in Investing Investors often talk about ‘risk’. “This investment is risky. That investment is not risky”. Every single investment in the world is risky. It’s just a matter of the amount of risk — and the type of risk. Let’s look at some types of risks: Liquidity risk. This refers to the risk of not being able to sell or buy when you want to. If you invest in a mutual fund or FD, liquidity is high — you can withdraw your investment within 2 days. Liquidity is low in an investment like real estate — sometimes it can take months to buy/sell a property. Imagine — you need money in an emergency but are not able to sell your property on time. This is liquidity risk. Concentration risk. This risk is seen when too much of a person’s money is invested in only one or a few assets. Example: say a person’s total investments are worth Rs 1 cr. In this, Rs 80 lakh is invested in shares of one company. If that company’s stock falls, the person can suffer big losses all of a sudden. Inflation risk. This risk arises because of unexpected inflation. Say your investments are earning 8% per annum. And inflation has mostly been 4 to 6%. But in one particular year, the inflation shoots up to 12%. Even if your investment is giving 8% in that year, your real return is negative (8% – 12% = – 4%). Equity risk This applies to shares investing where the price can change greatly in a short period. Say you invested Rs 10,000 in a stock and a year later, its price was Rs 4,000. This is an example of equity risk. Interest risk This applies to any investment related to interest rates. Say you invest in bonds. If the interest rates go up, your bonds can lose some value. Similarly, outside of investing, this risk applies to loans. Say you took a home loan at 7% per annum and the rate increases to 8% per annum. Your EMI value will go up now. This is an example of interest risk. Foreign currency risk. This risk is seen whenever investments are being made from one country into another. The exchange rate of the currencies of the two countries can change. Thereby affecting the final returns. Political risk. Every country’s economy is affected by the country’s politics. In certain cases, the political scenario in a country can be negative such that it affects the country’s economy — and in turn, it can affect the investments made in that country. Timeline risk This risk comes in when you need money in a period sooner/later than ideal for investment. Say you invested in equity mutual funds assuming you’ll not need the money for 10 years. 3 months later, the value falls. But for some emergency, you need this money at this point. This is an example of timeline risk or horizon risk. The Opposite could be you invest in low-risk investments for a short duration — but the money ends up staying in that investment for a long time. There are many other risks in investing too. Do research more!

Bonds and other fixed interest investments can often be under-appreciated or misunderstood by the average Australian investor, according to William Buck Wealth Advisory Director Adrian Frinsdorf. Following some tough years, the economic and market conditions now appear conducive for strong performance, with both well placed to outperform the market in 2024. “Many fixed rate bonds are now yielding between 5 and 7 per cent. Given the view that interest rates have either peaked or are close to peaking, this will make fixed rate bonds more attractive and likely to rise in capital value," he said in The Australian this week. Read more here: https://lnkd.in/gq2dBFzk William Buck, Emma Kittel

The big super funds’ allocation to fixed income is part of a broader trend: the increasing popularity of fixed income investments. In 2023, fixed income strategies have taken the lion’s share of ETF flows. Want in? Read our latest Vector Insight from Cameron McCormack.

According to the latest Investment Association statistics, over the year to August 2023, investors ploughed some £1.18bn into short-term money market funds as sentiment for risk assets continued to deteriorate. "𝙏𝙝𝙚𝙧𝙚 𝙞𝙨 𝙖 𝙧𝙚𝙖𝙨𝙤𝙣 𝙬𝙝𝙮 𝙖 𝙨𝙖𝙮𝙞𝙣𝙜 𝙡𝙞𝙠𝙚 '𝙙𝙤𝙣’𝙩 𝙥𝙪𝙩 𝙖𝙡𝙡 𝙮𝙤𝙪𝙧 𝙚𝙜𝙜𝙨 𝙞𝙣𝙩𝙤 𝙤𝙣𝙚 𝙗𝙖𝙨𝙠𝙚𝙩' 𝙞𝙨 𝙨𝙤 𝙬𝙚𝙡𝙡-𝙠𝙣𝙤𝙬𝙣, 𝙖𝙣𝙙 𝙩𝙝𝙖𝙩 𝙞𝙨 𝙗𝙚𝙘𝙖𝙪𝙨𝙚, 𝙞𝙩 𝙞𝙨 𝙟𝙪𝙨𝙩 𝙘𝙤𝙢𝙢𝙤𝙣 𝙨𝙚𝙣𝙨𝙚. 𝙄𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙞𝙨 𝙣𝙤 𝙙𝙞𝙛𝙛𝙚𝙧𝙚𝙣𝙩 𝙩𝙤 𝙢𝙖𝙣𝙮 𝙤𝙩𝙝𝙚𝙧 𝙖𝙨𝙥𝙚𝙘𝙩𝙨 𝙤𝙛 𝙡𝙞𝙛𝙚, 𝙣𝙤 𝙢𝙖𝙩𝙩𝙚𝙧 𝙝𝙤𝙬 𝙘𝙤𝙢𝙥𝙚𝙡𝙡𝙞𝙣𝙜 𝙩𝙝𝙚 𝙣𝙖𝙧𝙧𝙖𝙩𝙞𝙫𝙚, 𝙥𝙪𝙩𝙩𝙞𝙣𝙜 𝙖𝙡𝙡 𝙮𝙤𝙪𝙧 𝙖𝙨𝙨𝙚𝙩𝙨 𝙞𝙣 𝙟𝙪𝙨𝙩 𝙤𝙣𝙚 𝙞𝙨 𝙫𝙚𝙧𝙮 𝙪𝙣𝙡𝙞𝙠𝙚𝙡𝙮 𝙩𝙤 𝙗𝙚 𝙩𝙝𝙚 𝙧𝙞𝙜𝙝𝙩 𝙖𝙣𝙨𝙬𝙚𝙧.” - Chris Metcalfe IMC In an environment in which savings accounts are paying close to 5% in the UK, investors should not to ignore the merits of multi-asset investing for the perceived safety of cash reports Adam Lewis via International Adviser. #Investing #FinancialPlanning #WealthManagement https://lnkd.in/ep63BvV2

In an effort to expand my investment terminology, I wanted to share what I learned from Investopedia regarding Fixed Income Investments. Fixed-income investments, like bonds, offer a predictable stream of income and are less volatile than stocks. Here are some key points to know: 🧠 𝗪𝗵𝗮𝘁 𝗶𝘀 𝗙𝗶𝘅𝗲𝗱 𝗜𝗻𝗰𝗼𝗺𝗲? These investments pay fixed interest until maturity, then repay the principal. 💵 𝗧𝘆𝗽𝗲𝘀: Treasury bills, notes, bonds, municipal bonds, corporate bonds, and CDs. 🏛️ 𝗕𝗲𝗻𝗲𝗳𝗶𝘁𝘀: Steady income, lower volatility, and various protections. 📈 𝗟𝗮𝗱𝗱𝗲𝗿𝗶𝗻𝗴 𝗦𝘁𝗿𝗮𝘁𝗲𝗴𝘆: Invest in bonds with staggered maturities for steady returns and reinvestment flexibility. Diversifying your portfolio with fixed income can provide stability and reliable income. #Investing #FixedIncome #FinancialLiteracy https://lnkd.in/gQYRPX-J

Don’t be greedy: The pursuit of Real Returns through Fixed Income https://lnkd.in/dT7RF7ws Tlhoni (Tlhohonolofatso) Komako Komako, Fixed Income Portfolio Manager at Ashburton Investments Why it makes sense to opt for more conservative fixed income funds in the pursuit of risk-managed, inflation-beating investment returns. Everyone would like to have an investment portfolio with superior returns that shoots the lights out. But truth be told, superior returns often come from taking higher risks. As individuals, how do we invest tactically and safely to beat inflation instead of simply saving a few rands for a rainy day? Tlhoni Komako, Fixed Income Portfolio Manager at Ashburton Investments, believes it is important to start with...

#Australia's Future Fund reported a negative return of 0.5% in Q3 with A$900 million wiped off the value of the sovereign wealth fund to A$205.2 billion (US$130 billion) – but its 12-month return was a positive 6.3% amid heightened volatility. The fund continues to beat its long-term target return of 6.9% with its 10-year average annual return at 8.4%. However, the fund is now undershooting is benchmark with the one-year return and the three- and five-year averages undershooting by 1.0%, 1.2% and 3.1%, respectively. The fund's chair, Peter Costello, noted challenges in public equities and fixed income with further monetary tightening and geopolitical risk likely to weigh heavy on performance. He added, “Looking ahead the key issues remain the extent of further monetary policy tightening required to bring inflation back within central bank targets, how markets respond to those measures and whether the Israel-Gaza conflict turns into a wider regional war.” The fund has made a strategic tilt by reducing cash holdings by A$4 billion while bumping up credit investments by A$2.8 billion to take advantage of rising global interest rates. Investment grade credit is reporting higher yields than equities at 7-9%, which Future Fund sees as attractive on a risk-adjusted basis. The Future Fund reported in August that it had doubled its exposure to domestic corporate debt to A$1 billion as returns soared. The strategy is likely to persist due to inflation and higher interest rates, as well as demographic trends. This follows the trend seen among other institutional investors, including AustralianSuper, the nation’s largest super fund which now has 18% of its portfolio – totalling A$40 billion – in fixed income, after doubling its investment in the latest financial year. The super fund would like to go further and faster with investment in long-term corporate debt, but CEO Paul Schroder stated that the market needed to develop to allow increased allocations, with greater co-operation between banks, insurers, funds and companies. In equities, the Future Fund is moving away from its reliance on passive index strategies – or “set and forget” – as it seeks to respond to market volatility and persistent high inflation. Over the past two years, it has handed out mandates for developed and emerging market equities to external active managers, including UBS, State Street, Legal & General, Insight and Robeco. In 2017, the sovereign fund turned overwhelmingly to passive mandates to reduce costs, having concluded that the fees demanded by active managers were not justified, but its bearish outlook has prompted it to re-engage to seek opportunities in an uncertain market. Additionally, the fund is utilizing specialist managers, including in risk assets such as venture capital where prices are cheaper and more competitive due to risk aversion. Article: https://lnkd.in/ef4USgDJ

Should term deposits play a role in a portfolio? Schroders’ fixed income managers Adam Kibble and Kellie Wood share their thoughts on investing in term deposits and whether Australia will see a soft landing or will fall into a recession. Read more in this Money Management Australia article: https://lnkd.in/dd_tFETC #fixedincome #recession #economicgrowth #inflation #termdeposits