Ethical or Sustainable Responsible Investment (SRI) is the integration of personal values with investment decisions. It is an approach to investing that considers both the profit potential and the investment's impact on society and the environment.

Sustainable Responsible Investment may avoid industries such as gaming, tobacco, armaments or uranium mining and companies with little regard for the environment, governance, and labour and human rights. On the other hand, SRI may also actively seek out profitable 'industries of the future' that are positive for society and the environment such as renewable energy, biotechnology, water management, waste management and health care.

Many investors want their investment holdings to reflect their values, and support companies that behave in ways they consider appropriate or responsible. That is why growing numbers are getting behind investment managers and companies that are perceived to be doing the right thing on a range of ethical, social and environmental issues.

Ethical, or socially responsible investing can take many forms, but according to the Ethical Investment Association of Australia, the most established ways of investing ethically are:

In spite of the rise in popularity of socially responsible funds opponents have argued that by excluding many stocks in a particular sector (for example, resources), such funds will be disadvantaged when these sectors do well. Even when ethical funds perform well, there has been criticism that the positive performance would be short lived. This is not the case. While past performance is not a reliable indicator of future performance, many ethical investment funds have performed as well as or better than conventional peers over considerable periods of time.

SRI out-performance in Australia

Source: AMP Capital SRI Industry Performance Study, May 2006.

Which just goes to show investors are able to have the best of both worlds by obtaining excellent financial returns while also supporting socially responsible companies.

Under Australian Corporations Law, investment managers are required to show in their Product Disclosure Statements "the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment". This is designed to encourage transparency and allow investors to compare one product with another. However, compliance levels are still patchy with the scope and content of relevant information disclosures varying from manager to manager.

Information courtesy of Ethical Investment Association, Finsia and Australian Stock Exchange

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HISTORY OF SOCIALLY RESPONSIBLE INVESTING

The beginning of socially responsible investing could be attributed to many people and many places. Many believe social investing began with the Religious Society of Friends (Quakers). In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the business of buying or selling humans. Religious institutions have been at the forefront of social investing ever since. One of the most articulate early adopters of SRI was John Wesley (1703-1791), one of the founders of the Methodist Church. A sermon of his, entitled "The Use of Money," outlined his basic tenets of social investing – i.e. not to harm your neighbor through your business practices and to avoid industries like tanning and chemical production that pollute rivers and streams.

In the late 1970s, SRI activism turned its attention to nuclear power and automobile emissions control. These issues, and the people who promoted them, established the groundwork for SRI as it is today.

From the 70's to the early 90's, large institutions avoided investment in companies that were related to the government and apartheid policies of South Africa . After the Sharpeville Massacre in 1960, international opposition to apartheid strengthened. In 1976 the United Nations imposed a mandatory arms embargo against South Africa . In 1971, Reverend Leon Sullivan (at the time a board member for General Motors) drafted a code of conduct for practicing business in South Africa which became known as the "Sullivan Principles." These principles sought to document the practices of American companies within South Africa . Reports documenting the application of the Sullivan Principles discovered that US companies were not attempting to lessen discrimination within South Africa. Because of these reports and mounting political pressure; cities, states, colleges, faith-based groups and pension funds throughout the United States began divesting (or removing their investments) from companies operating in South Africa. The subsequent negative flow of investment dollars eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to apartheid. While the SRI efforts alone didn't bring an end to apartheid, it did focus persuasive international pressure on the South African business community.

CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility (CSR) is a concept that suggests that commercial corporations have a duty of care to all of their stakeholders in all aspects of their business operations. A company’s stakeholders are all those who are influenced by, or can influence, a business’s decisions and actions. These can include (but are not limited to): employees, customers, suppliers, community organizations, subsidiaries and affiliates, joint venture partners, local neighborhoods, investors, and shareholders.

CSR requires that businesses account for and measure the actual or potential economic, social and environmental impacts of their decisions. In some cases the application of a strong CSR policy by a business can involve actions being taken which exceed the mere compliance with minimum legal requirements. This can sometimes give a company a competitive/reputational advantage by demonstrating that they have the interests of society at large as an integral part of their policy making. CSR goes beyond simple philanthropy and is more about corporate behaviour than it is about a company's charitable donation budget.

CSR is closely linked with the principles of Sustainable Development which argue that enterprises should be obliged to make decisions based not only on financial/economic factors (e.g. Profits, Return on Investment, dividend payments etc.) but also on the social, environmental and other consequences of their activities.

Development and analysis

Today’s heightened interest in the role of businesses in society has been promoted by increased sensitivity to, and awareness of environmental and ethical issues. Issues like environmental damage, improper treatment of workers, and faulty production leading to customers inconvenience or danger, are highlighted in the media. In some countries government regulation regarding environmental and social issues has increased, and standards and laws are also often set at a supranational level (e.g., by the European Union). Some investors and investment fund managers have begun to take account of a corporation’s CSR policy in making investment decisions (so called "ethical investing"). Some consumers have become increasingly sensitive to the CSR performance of the companies from which they buy their goods and services. These trends have contributed to the pressure on companies to operate in an economically, socially and environmentally sustainable way..

It is important to distinguish CSR from charitable donations and "good works" (i.e., philanthropy, e.g., Habitat for Humanity or Ronald McDonald House). Corporations have often, in the past, spent money on community projects, the endowment of scholarships, and the establishment of foundations. They have also often encouraged their employees to volunteer to take part in community work and thereby create goodwill in the community which will directly enhance the reputation of the company and strengthen its brand. CSR goes beyond charity and requires that a responsible company take into full account their impact on all stakeholders and on the environment when making decisions. This requires them to balance the needs of all stakeholders with their need to make a profit and reward their shareholders adequately.

A widely quoted definition by the World Business Council for Sustainable Development states that "Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large." (CSR: Meeting Changing Expectations, 1999). This holistic approach to business regards organizations as (for example) being full partners in their communities, rather than seeing them more narrowly as being primarily in business to make profits and serve the needs of their shareholders.

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 Investment Philosophy

At Direct Advisers our methodology is to develop appropriately tailored investment strategies prior to selecting investments. Our investment philosophy is concerned with maintaining an optimal balance between the level of risk and the level of return. To achieve this goal we aim to identify and understand risk factors, and to exploit these factors in a controlled manner utilising dynamic and strategic asset allocation models. Our philosophy does not seek to eliminate risk, but rather enhances your investment returns by retaining an appropriate level of risk, consistent with your personal objectives.

All of our investment recommendations are determined by this risk/return framework and our asset allocation models.

The stated objective of the Direct Advisers investment philosophy is to achieve above average investment returns consistently with below average volatility, over a five year period. We base our investment recommendations on a long term outlook, typically at least five years, and accordingly these recommendations are strategic in nature. The specific investment strategy that we use is called The Split Portfolio Method.

Direct Advisers also places a strong emphasis on understanding and managing change, whether this be economic change, regulatory change, market change or changes in your own personal circumstances.As well as this we continually review investments, asset classes and markets.

The Split Portfolio

The Split Portfolio Investment Strategy of investment was designed because many investors would like to have sufficient investment returns to protect their capital from inflation and at the same time do not want to see major fluctuations in the short term value of their investment portfolios.

The Split Portfolio Investment Strategy achieves this by splitting an investment portfolio into two main areas: being true fixed interest securities and quality Australian shares. Investment portfolios are further diversified through the inclusion of relatively small amounts of property and international investments where appropriate.

The fixed interest portion of the Split Portfolio usually comprises a mixture of term certain annuities, first ranking debentures from the major bank owned finance companies and government and semi government bonds. These fixed interest investments have been selected due to their security ratings and long term track records in the payment of interest and return of capital at the end of the investment term.  The fixed interest portion of the Split Portfolio usually comprises a mixture of term certain annuities, first ranking debentures from the major bank owned finance companies and government and semi government bonds. These fixed interest investments have been selected due to their security ratings and long term track records in the payment of interest and return of capital at the end of the investment term.

One of the traditional problems associated with fixed interest securities has been that investors tied their money up for the full term of the investment and would miss out if interest rates rose before their investments matured. This particular problem has been overcome with the Split Portfolio Investment Strategy by using staggered investment and maturity dates which usually results in part of the portfolio maturing and becoming available for reinvestment every six or twelve months.

The Australian share component of the Split Portfolio is comprised of investments in a number of specially selected leading Australian Equity Trusts. These Equity Trusts pay out regular income of which a large proportion may be tax free due to imputation credits. These imputation taxation credits may in some circumstances also be applied to the income received from the fixed interest component of the Split Portfolio resulting in a totally tax free income stream for some investors.

As well as producing income the Australian share component of the Split Portfolio is also expected to provide investors with significant capital growth over the medium to longer term thus protecting capital from the effects of inflation. Furthermore, this part of the Split Portfolio is not locked in and can normally be redeemed in part or in full within 30 days. Nevertheless investors who use the Split Portfolio Investment Strategy should have a medium to longer term investment time horizon of at least five years.

In addition to Australian fixed interest and sharemarket investments the Split Portfolio also incorporates a small amount of Australian property and international sharemarket investments where appropriate.

All Split Portfolios incorporate a cash reserve for emergencies.

The various investments that comprise a Split Portfolio can only be made on application forms found in the relevant prospectuses and customer information brochures.

It is important to realise that because everyone has different circumstances there is no single standard off the shelf Split Portfolio.  Each Split Portfolio is specifically tailored to the unique requirements of each individual client following an initial needs analysis and financial plan.  Because financial markets have shown themselves to be quite volatile it is important to ensure that the Split Portfolio be correctly implemented. This means that all of the investments that comprise the Split Portfolio need to be implemented on a progressive basis over a six to twelve month period. If this approach is followed the effect of any negative short term market movements upon the Split Portfolio will be minimised.

Once investments have been implemented using the Split Portfolio Investment Strategy it is important for there to be a continual investment monitoring procedure. This is because some of the fixed interest investments will mature each year and advice will be needed as to the most appropriate replacements. In addition to this, economic conditions change as do personal circumstances and therefore ongoing adjustments will need to be made to the sharemarket and other components of the Split Portfolio from time to time.  

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The Asset Allocation Approach

An investment asset allocation is simply the way in which an investment portfolio is diversified over the investment classes of cash, fixed interest, property and shares. Investors who stick to their asset allocation recommendations through all phases of the markets cycle are almost always rewarded. In comparison, poor investment returns are achieved by people who invest for too short a period, or who panic and change their portfolio at the first significant market downturn.

Our approach is to set recommended asset allocations for each investor risk profile and identify a time frame in which the expected returns would be likely to be achieved for each of the profiles. These recommended asset allocations and time frames are based on research and recommendations provided by Lonsec, Standard & Poors and Aegis.

Success in following these recommendations requires two things:  

Property 

Many Australian investors have an emotional attachment to property investment because of its tangible nature and that in the 1970’s and 1980’s property returns were high. It is also important to remember that inflation rates were extremely high during this period. Lower inflation rates in the 1990’s have resulted in much lower investment returns being achieved from property. Nevertheless, most investment portfolios should have some exposure to property investment.

There are five main areas of property investment:

Whilst in theory it is possible to directly invest in all of the above, in practice very few people have the capital resources to achieve even a moderate level of diversification from direct property investment. For this reason a number of alternatives to direct property investments have been developed (for example, property securities funds, listed property trusts and property investment companies) to allow a more balanced investment portfolio.

Property is often regarded as a risk free investment because property markets are fragmented and prices are not determined every day. In reality there are moderate risks involved because the value of a property cannot be known until it has been sold. In addition, problems with tenants can impact negatively upon rental returns. Perhaps the biggest risk associated with direct property investment is its lack of liquidity, as any buyer of property needs to have access to significant funds.

Property has historically provided a good hedge against inflation because property prices tend to rise in a trend, which corresponds with inflation. However, in times of lower inflation and rising unemployment, property returns will be moderate. In fact in times of recession, property prices will tend to fall.

Some tax benefits can be achieved through depreciation of the building and of plant and equipment within it. Expenses incurred to maintain the property are tax deductible. There are also the indexing advantages on capital gains, which reduce the amount of capital gain that is taxable.  

Balanced funds should be significantly more tax effective than capital stable funds due to their higher levels of exposure to Australian shares and listed property trusts. This will provide you with additional imputation credits and depreciation allowances. In fact the only type of investment that is likely to be more tax effective is that of Australian share funds.

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 Property Securities Funds

Property securities funds generally do not own property directly, but rather hold property trusts and property companies that are listed on the Australian Stock Exchange as their underlying investments. There are many different types of listed property trusts and companies with some focusing on, for example, retail properties (Westfield Property Trust), some operating in particular geographical areas (Capital Property Trust) and others being quite diversified (General Property Trust).

Risks and Returns

It is important to remember that the underlying investments in property securities funds are trusts and companies that are listed on the Australian Stock Exchange. This means that they will to some extent follow the trends of the Australian stock market. Historically, listed property trusts have shown themselves to be less volatile than other sectors of the stock market. Listed property trust values are also effected by the level of interest rates, as investors often buy listed property trusts for the income that they produce. This means that when interest rates go down, listed property trusts go up in value and vice versa.

By investing in property securities funds it is possible to have far more diversification and therefore less risk than by investing directly in listed property trusts or companies. In general, property securities funds produce higher levels of income and lower levels of capital growth than do sharemarket funds and their overall level of return will tend to be lower than sharemarket funds.

Accessibility and Recommended Investment Time Frame

Most fund managers will process withdrawals within five working days, however they usually have the discretion to delay withdrawals for up to thirty days.

The recommended minimum investment time frame is four years.

Tax Effectiveness

Part of the income that is received from property securities funds is likely to be tax free or tax deferred due to depreciation allowances that are received for depreciation on plant and equipment within buildings as well as depreciation on the buildings themselves. (Please see the taxation section for further details.)

As the level of capital growth is likely to be below the rate of inflation, it is likely that there will be no capital gains tax on the eventual sale of property securities funds.  

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Shares

When you buy shares, you buy a proportion of an existing business. Sharemarket investors may receive income in the form of dividends and capital growth over the longer term as company profits increase.

Deciding which companies in which to invest requires extensive knowledge not only of individual companies but also of financial markets and the factors that may impact upon a company’s profitability and share price. Furthermore, in order to achieve a properly diversified portfolio, very large amounts of money would be required. For this reason, many people prefer to invest in equity (or share) trusts rather than investing directly in the stockmarket. This approach allows them to participate in a large, well diversified and professionally managed portfolio of shares and thus reduces risk.

Shares are the most volatile asset sector as share prices can change from moment to moment. Share prices are influenced by real events, which relate either to the company, the industry in which the company operates, or general economic conditions. In addition, share prices are influenced by people’s perceptions of how present and future events may impact upon individual companies.

As a trade-off for the potentially greater returns, shares also have a higher level of short term risk - on any particular day you may or may not get the price you expect.

The income earned from Australian shares is amongst the most tax effective available, due to dividend imputation. This means that where an Australian company pays dividends to its shareholders from profits, which have already been taxed, the shareholder receives a personal tax credit equal to the amount of tax which the company has already paid. There are also indexing advantages on capital gains, which reduce the amount of capital gain that is taxable.  

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Australian Share Funds

These are also known as equity funds or imputation funds. Their underlying investments are shares listed on the Australian Stock Exchange. The funds that we recommend generally prefer to buy shares in “blue chip” companies, that is, larger and well known companies whose shares are constantly in demand. Examples would be Telstra, National Australia Bank, AMP, Coles Myer and so on. Some smaller companies may also be included, however the definition of a smaller company is one with a market capitalisation of at least $100 million.

Risks and Returns

Sharemarket investments are generally seen as risky and volatile, however this is more the case in the short term rather than over the longer term when shares have generally been the best performing of all of the asset classes. The key to sharemarket investment is to buy quality and to hold the shares or share funds over the longer term. If this strategy is followed, then even allowing for the occasional major correction in the share market, the longer term benefits will be substantial.

One of the major benefits of holding sharemarket investments is that over a period of time company profits will rise resulting in an increase in the level of dividend income that is received by investors. This increase in company earnings is the major factor determining future share prices and therefore it is likely that the value of shares will increase over time.

Nevertheless, it must always be remembered that the greater the proportion of shares held in a portfolio, the greater will be the level of risk, especially in the short term.

Accessibility and Recommended Investment Time Frame

Most fund managers will process withdrawals within five working days, however they usually have the discretion to delay withdrawals for up to thirty days.

The recommended minimum investment time frame is five years.

Tax Effectiveness

Investing in Australian shares is the most tax effective of all the asset classes. This is because dividend imputation (please see the taxation section) allows the income from Australian shares to be received tax free by many investors. Even investors in the Top tax bracket only have to pay tax at the rate of 12.5% on the income that they receive from companies paying the full rate of Australian company tax.

Capital gains tax is likely to be payable on capital profits made by investing in Australian share funds, however the impact of capital gains tax is reduced by inflation indexing which means only the capital gains above the rate of inflation will be taxed.

International

As Australia represents only a very small proportion of the international economy it is prudent to have some diversification away from the Australian economy. International diversification will provide exposure to companies and whole industries that do not operate within Australia. In addition, international investments will provide some diversification away from Australia’s domestic business cycle.

International investments are available in shares, fixed interest and property. However income earned from international investments is not as tax efficient, as tax may often need to be paid on all of the income, even though there is a small allowance for foreign tax credits.

International investments also carry an additional risk, that of currency fluctuations. If our dollar rises, overseas investments fall in value and losses occur. On the other hand, if our dollar falls, overseas investments go up in value and capital profits are made. Whilst it is possible to insure against adverse currency movements by hedging, the cost of hedging may reduce returns if our currency does not rise.  

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International Share Funds

As the Australian share market represents less than 2% of the world’s sharemarket capitalisation, it is logical to include some exposure to international shares. Another reason is that there are many major corporations that are not represented on the Australian Stock Exchange such as Microsoft, Ford and Sony.

The international share funds that we prefer to recommend are of the diversified global type. This means that their share portfolios are spread across the world’s major share markets and are not restricted to any particular country or market segment.  

Risks and Returns

Apart from the normal risks associated with sharemarket investments (as indicated in the Australian sharemarket section), international share funds carry an additional risk associated with currency fluctuations. When our dollar rises in value against other currencies, investors in international funds may see the value of their investments fall. However, when our dollar falls in value, investors in international share funds benefit. Astute currency management techniques can minimise this type of risk, but this can be at the expense of reduced returns.

Even though investors in international share funds have generally seen their investments outperform most other investment sectors over the last fifteen years, these investments probably carry the highest risk within your portfolio, especially in the shorter term.

Some international funds invest only in specific countries or regions such as Japan or the USA, and as a result may from time to time produce very high levels of performance, however we do not recommend these sector funds due to the higher risks associated with them.

Accessibility and Recommended Investment Time Frame

Most fund managers will process withdrawals within five working days, however they usually have the discretion to delay withdrawals for up to thirty days.

The recommended minimum investment time frame is six years.

Tax Effectiveness

Because dividend imputation only applies to Australian companies, the income received from international share funds is limited in tax effectiveness to foreign tax credits received for tax paid to overseas governments.

Capital gains tax may be payable on capital profits made by investing in international share funds, however the impact of capital gains tax is reduced by inflation indexing which means only the capital gains above the rate of inflation will be taxed.

Since the advent of the Foreign Investment Funds legislation, international funds are required to pay out as income all capital gains made during the financial year. This has resulted in international share funds becoming predominantly income producing investments.

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Cash

You should always keep some cash readily accessible for emergencies and flexibility.

Cash may be kept in an ordinary bank, building society or credit union account, a cash management trust, or a money market investment account. Cash management and money market accounts offer the advantages of pooling funds together to invest the large amounts necessary to participate in the professional short term money market. This results in higher interest rates than the more traditional savings accounts.

Cash is the most secure type of investment because whilst interest rates may vary, the value of the capital amount invested will not.

Security of capital is dependent upon the quality of the financial institution with which funds are placed and how it invests its deposits. Even though the risks are usually very low, the trade-off for the security of cash is that historically it has offered lower returns than other investment sectors in the medium to longer term.

Cash does not offer any tax advantages because all income is fully taxable. Also, cash provides no capital growth.  

 Cash Based Investments

A number of different investments are represented by this category including bank and similar accounts as well as cash management and money market accounts. The underlying investments are a combination of cash, overnight and short term money market securities, treasury notes and bank bills.

Risks and Returns

Cash type accounts are the safest of all investments in that the capital values can only fall due to withdrawals and / or fees. The only other way that capital can be lost is in the unlikely event of the failure of the financial institution to honour withdrawal and whilst this is possible, in reality it is most unlikely. Due to the combination of security and virtual immediate access to funds, these investments produce the lowest rates of return.

Accessibility and Recommended Investment Time Frame

These investments are known as on call funds because monies in these accounts are available on demand, either over the counter, teller machine or by cheque. For this reason there is no minimum time frame over which on call investments should be held.

Tax Effectiveness

As the return from cash based investments is purely in the form of interest, there is no tax effectiveness as all of the interest earned (less fees) is taxable income.

Fixed Interest

Fixed interest investments are loans to governments, government authorities, banks, other financial institutions and companies. The issuer of a loan will pay a rate of interest, which is specified when the loan is first arranged with a time frame set for the loan to be repaid at a specified date in the future. These maturity dates can vary from a few months to many years.

Fixed interest is a very secure form of investment because the interest payable and the amount to be repaid upon maturity is known in advance.

On a retail level where bonds and fixed interest investments are usually held until they mature, risk is usually low. However, professional investors tend to trade extensively and sell bonds before reaching maturity. This means that it is possible for bonds to produce capital gains as well as capital losses. Capital gains are usually made in a falling interest rate environment, whilst capital losses are usually made when interest rates rise. In bond and capital stable funds, which trade bonds, risk will be moderate.

Fixed interest investments may include the purchasing and trading of bonds as well as direct investments using term deposits, debentures and term certain annuities.

The interest income from a fixed interest investment is usually fully taxable. Any capital gains are also fully taxable. Fixed interest investments generally do not provide protection against inflation.

Australian Fixed Interest Funds

These comprise mortgage funds, term deposits and debentures.

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Mortgage Funds

These funds borrow money from investors and lend them out to borrowers. They are called mortgage funds because the borrowings are secured by mortgages over property. Mortgage funds will generally only lend up to 66% of the property value and will only go above this level if mortgage insurance is provided. Mortgage funds will also hold bank deposit and short term money market investments to provide liquidity so that redemptions can be paid.

Well managed mortgage funds will loan money out to a number of different borrowers at a mixture of different interest rates and for different periods of time. This is different to solicitor’s first mortgages where your money may be loaned to one borrower only.

Risks and Returns

The main risk with this type of investment is that the borrower will default through not being able to pay either the interest on the loan or to repay capital when required. This risk is reduced to some extent by the borrowing limitations mentioned above and the use of mortgage insurance. Nevertheless, an optimistic valuation of the property providing the security for the loan can result in failure to recover all monies owed in the event of a default.

Another risk associated with this type of investment is that of a mismatch between the term of the loans to borrowers and the level of accessibility afforded to investors. This risk is reduced by ensuring that adequate cash reserves are held within the fund and by structuring the loans within the fund so that they have progressive maturity dates. Many mortgage funds impose exit fees to ensure that these funds are not used by investors who are likely to require their money within a short period of time.

Because of their large size and mix of loans, the mortgage funds provided by the major financial institutions that we recommend have a relatively low level of risk compared to solicitor’s mortgages and share market investments. It is unlikely that their capital values will vary and at the same time they should produce a level of income that is one to two percent higher than cash investments.

Accessibility and Recommended Investment Time Frame

Many mortgage funds have exit fees to discourage short term investment. Nevertheless, most fund managers will process withdrawals within five working days, however they usually have the discretion to delay withdrawals for up to thirty days or more in some circumstances.

The recommended minimum investment time frame is two years.

Tax Effectiveness

All of the income from a mortgage trust is interest and is therefore fully taxable. This means that mortgage funds provide no tax effectiveness.  

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 Term Deposits and Debentures

Term deposits and debentures are loan securities whereby you receive a fixed rate of interest for a fixed term at the end of which you will receive your capital back in its entirety. Term deposits are usually offered by banks, building societies, credit unions and other similar financial institutions. Debentures are usually offered by finance companies.

Risks and Returns

Term deposits provided by banks and debentures provided by finance companies owned by a major bank, for example, Esanda (ANZ), AGC (Westpac) and CBFC (Commonwealth) are highly secure, thus the likelihood of you losing capital or interest is quite remote. Due to their high levels of security, these investments provide only moderate levels of returns, however it is possible to receive a higher interest rate if you invest for longer terms.

Accessibility and Recommended Investment Time Frame

Generally speaking, these investments cannot be accessed prior to their maturity dates. However in some circumstances, the financial institutions involved may be willing to redeem your investment prior to maturity, which may result in you forfeiting part of your capital and / or interest by way of penalty. The debentures offered by the major bank owned finance companies are traded by stockbrokers and can therefore be sold at any time. If these debentures are sold before maturity the result may be either a capital gain or capital loss depending upon prevailing interest rates.

The investment time frame is the term to maturity that is chosen. It is therefore important to ensure that if these monies are required for some other purpose, then investments should be chosen with appropriate maturity dates. When term deposits and debentures are used, we recommend that the capital be split so that the investments mature at different times.

Tax Effectiveness  

All of the income from term deposits and debentures is interest and is therefore fully taxable. This means that these investments provide no tax effectiveness.

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Diversified Capital Stable Funds

These diversified funds have underlying investments that cover the main asset classes of property, shares, interest and cash. A capital stable fund will typically hold approximately 75% of its assets in cash and fixed interest, with perhaps 20% in shares (usually Australian shares) and about 5% in property. It is important to realise that these proportions are not fixed and that the fund manager has the discretion to adjust the underlying asset allocation according to market and economic conditions. Nevertheless, capital stable funds will rarely have less than 75% of their assets in cash and fixed interest.

Risks and Returns

Capital stable funds are a relatively secure investment because of their low exposure to shares. Because there will usually be some exposure to the sharemarket it is likely that capital stable funds will be effected by significant sharemarket movements (both up and down). Due to their high exposure to bonds, capital stable funds are likely to make capital gains when interest rates are falling and capital losses when interest rates are rising.

The actual performance of a capital stable fund will be dependent upon the skill of the manager and the particular strategies that are followed. It is our policy to recommend capital stable funds that have different investment strategies and thus different levels of exposure to the bond and share markets. The returns from capital stable funds will be primarily oriented towards income, however some capital gains are also likely to be made over time.

Accessibility and Recommended Investment Time Frame

Most fund managers will process withdrawals within five working days, however they usually have the discretion to delay withdrawals for up to thirty days.

The recommended minimum investment time frame is three years.

Tax Effectiveness

Because capital stable funds have some exposure to Australian shares and listed property trusts they are more tax effective than pure interest or bond investments. We would estimate that perhaps 20% of the income would be of a tax effective nature. Because the level of capital gains made by these funds is likely to be similar to or below the rate of inflation, the tax on the capital gains made is likely to be minimal.

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 Diversified Balanced Funds

Balanced funds are similar in concept to capital stable funds and are in fact almost a mirror image of them. Diversified balanced funds may have up to 60% of their underlying assets in shares and will have a much higher exposure to international investments than capital stable funds. Property exposure may also be as high as 15%, thus leaving a balance of maybe 25% spread over cash and interest. Once again the manager has the discretion to adjust the underlying asset allocations.

Risks and Returns

Because they have a much higher exposure to the sharemarket, these funds have a higher level of risk attached to them than do capital stable funds, but are also likely to produce higher returns. By way of example, if a balanced fund had a 50% exposure to the stockmarket and the stockmarket fell in value by 30%, then the balanced fund would fall in value by approximately 15%. Conversely, if the stockmarket rose 30%, the balanced fund would rise by 15%. We would expect these funds to provide you with somewhat higher levels of capital growth as compared to income.

Accessibility and Recommended Investment Time Frame

Most fund managers will process withdrawals within five working days, however they usually have the discretion to delay withdrawals for up to thirty days.

The recommended minimum investment time frame is four years.

Tax Effectiveness

Balanced funds should be significantly more tax effective than capital stable funds due to their higher levels of exposure to Australian shares and listed property trusts. This will provide you with additional imputation credits and depreciation allowances. In fact the only type of investment that is likely to be more tax effective is that of Australian share funds.

It is likely that these funds will produce a level of capital growth that is above the rate of inflation and therefore that component of the growth will be subject to capital gains tax.

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Allocated Pension Funds

Risks and Returns

The risks and returns from an allocated pension depend upon the underlying investments.

Accessibility and Recommended Investment Time Frame

As the allocated pension is contained within a master fund structure, the accessibility lies in the first instance with the underling investment funds which will normally process withdrawals within five working days, however they usually have the discretion to delay withdrawals for up to thirty days. In the second instance, accessibility lies with the manager of the master fund, which will process your withdrawal once it has received your money from the underlying investment fund. Because allocated pension funds are governed by superannuation legislation, changes to this legislation may restrict your ability to withdraw lump sums in the future.

Even though at present there is no legislative restriction to withdrawing lump sums from allocated pension funds, our recommendation is that you view this investment as a means of providing you with a lifetime income stream.

Tax Effectiveness

As mentioned in the taxation section, allocated pensions are an extremely tax effective investment structure which can pay you significant amounts of tax free income each year.  

Types of Risk

The basic definition of risk is that your financial expectations will not be achieved. There are various events that may result in your expectations not being achieved and they include:

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You can use the Australian Superannuation System to minimise your tax and get tax free income

Contact our experts to find out more: enquiries@directadvisers.com.au  

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	Did you know that Australian Superannuation Funds pay a 15% maximum rate of tax on their investment income?
	Did you know that it is possible to reduce this rate of tax to zero?
	Did you know that Australian Superannuation Funds pay only 10% tax on their capital gains?
	Did you know that Pension Funds set up within the Australian Superannuation System pay NO tax on their income and capital gains?
	Did you know that it is possible to receive a totally tax free income by using a Pension Fund set up within the Australian Taxation System?

There are substantial benefits from using the Australian superannuation system, both as a means of accumulating assets in a tax effective environment as well as by using an allocated pension as an investment vehicle in retirement.

Our experts can show you how to best utilise the Australian Superannuation System to minimise the tax you pay. 

Please click here for information on Superannuation

How hard we work to provide for our family, yet how little thought we give to ensuring the protection of our work for our family’s benefit in the event of an untimely disablement or death.  

40% of Australians die without a will! Many more have wills that are outdated and no longer relevant to current circumstances. Don’t allow yourself to be one of them - the effects upon your family and loved ones can be catastrophic.

In addition to a current will, it is also important to ensure that a trusted person (usually a family member) holds an Enduring Power of Attorney for you in the event of you becoming incapacitated due to illness or injury.  This will allow for your affairs to continue to be managed in the way you want.  

Wills 

A will is a legal document allowing you to direct the way in which your assets will be disposed of after your death. An existing will remains in force unless a new will is made or the testator (the person making the will) marries (or remarries) or is divorced. In order to be valid, a will must be in writing, signed by the testator and properly witnessed by a person who is neither a beneficiary, nor the spouse of a beneficiary under the will.

Therefore when preparing a will, you should consider who you would like to receive all or part of your estate when you die, and who will benefit if any or all of your beneficiaries should predecease you.

You should also be aware of the impact of capital gains tax upon deceased estates. Any assets sold by your executor could be subject to capital gains tax, which may reduce the amount paid to the beneficiaries. If assets are transferred to beneficiaries after your death, then they may have to pay capital gains tax when they eventually sell the assets.

Once your wills have been drawn up, it is essential that they be reviewed on a regular basis.

Executor

The executor is the person who has the legal responsibility to ensure that the instructions in the will are carried out. It is therefore important that your executor be someone who understands your wishes and has the capacity to see that they are carried out. It is also important to nominate an alternative executor in case your chosen executor predeceases you. The executor has a number of responsibilities including obtaining probate, paying debts and taxes, compiling financial statements and distributing assets to the beneficiaries.

Beneficiaries

A beneficiary is any person whom you wish to benefit from your will. For example, you can leave specific items of property or investments to specific individuals either within or external to your family.

Trustee

The executor of your will is also the trustee of your estate, however it is possible to appoint additional trustees as well. The job of the trustee is to implement the terms of your will by making distributions to beneficiaries and ensuring that any investments of the estate are appropriate and according to any guidelines that you wish to establish. Funds can be held in trust for beneficiaries who are incapacitated or minors.

Testamentary Trusts

A testamentary trust is simply a trust established by a will. This means that part or all of your assets need not be distributed after your death, but can instead be held in trust for specific beneficiaries under your will. This means that the testamentary trust could be used as means of providing income to certain beneficiaries. If those beneficiaries are minors, they will not be subject to the usual punitive levels of tax (at rates up to 66%) normally paid by minors.

A testamentary trust also provides a safe haven in the event of bankruptcy as its assets are not accessible to creditors.

 Enduring Powers of Attorney

A power of attorney is a document, which allows one person to legally act on behalf of another. The power of attorney can be quite specific in that it may be limited to certain actions or to a certain period of time. Alternatively, it can be unlimited, in which case it endures until, it is revoked by the person who granted it. Thus enduring powers of attorney are often used in anticipation of incapacity brought about by accident, illness and other reasons. A power of attorney can be revoked at any time by the person who initially granted it.

In conjunction with a professional legal advisor, we will help you design an appropriate Estate Planning Strategy to ensure the continuation of your family’s lifestyle should something unforeseen occur.

Something as important as your Family’s future should not be left to chance.

 Accumulation fund : a superannuation fund where the benefit received by the investor is determined by the contributions that have been invested and the investment earnings, less any fees and taxes.

Allocated pension or annuity : a retirement income investment where an individual invests their super money and receives an income periodically. The value of the account depends on the investment earnings and the amount of income taken. The capital is accessible and the income is flexible. There is no guarantee that the income will be paid for life.

All Ordinaries Accumulation Index : a measurement of the average movements in share price of a selection of major Australian companies listed on the Australian Stock Exchange. It is an accumulation index, which means that it assumes that dividends have been reinvested.

Annuity : a regular income stream paid to an individual from a lump sum investment, usually for the purposes of retirement income.

Application : to apply for an investment in a unit trust or managed fund.

Application Price : the price per unit or share of an investment in which applications are made.

Appreciation : the increase in the value of an asset.

Asset allocation : a representation of how a portfolio is invested among the various available asset classes. eg a balanced fund may have an asset allocation of 30% shares, 25% international shares, 10% property, 20% fixed interest, 10% international fixed interest, 5% cash.

Asset classes : the range of financial securities, such as shares, bonds, property, cash and overseas investments.

Balanced fund : a type of managed fund whose investment strategy is to have, at all times, some proportion of its investments in all asset classes, creating a risk/return balance between the types of investments.

Bear market : a market that is decreasing over time. The opposite to a bull market.

Benefit : in relation to superannuation, the entitlement to a lump sum, pension or annuity.

Blue chip shares : shares in well established companies that have shown ability to pay dividends in uncertain markets.

Bonds : Bonds, also known as fixed interest securities, are agreements that guarantee to repay a fixed amount of money at a pre-determined date in the future (maturity date). Bonds are generally issued by governments, banks or companies to finance investment projects.

Broker : an agent who executes an investor's orders to buy or sell securities.

Brokerage : a fee charged by a financial adviser or stockbroker for a transaction. Sometimes also referred to as commission.

Bull market : a market that is increasing over time. The opposite to a bear market.

Capital gains/growth : occur when the market value of an investment increases.

Capital gains tax : a tax on the gains of an investment, payable only when the capital gain is realised by selling the investment. Interested in more information on how investments are taxed?

Cash : one of the asset classes. Coin and note currency in circulation and in deposit accounts and money market securities.

Cash Management Trust (CMT) : a form of managed investment in which the primary investment is cash securities. While offering security, they can also offer the potential for a higher return than an ordinary bank savings account. Want to know more about cash management trusts?

Commission : a fee paid to a financial adviser or stockbroker for a financial transaction or advice. Sometimes also referred to as brokerage.

Compound interest : interest calculated on the principal and interest already accrued.

Concessional component : superannuation benefits received before 1 July 1994 which relate to certain disablement, redundancy and approved early retirement benefits.

Constitution : formerly known as a Trust Deed, a document setting out the methods of application, investment and withdrawal of funds within a managed investment, unit trust or superannuation fund.

Consumer Price Index (CPI) : an index measuring the prices of items of goods and services. Allows comparison of the relative cost of living over time, typically know as inflation.

Contributions : amounts of money placed into a fund.

Contributions Tax : tax applied to certain contributions to a superannuation fund.

Currency gains : the contribution to a security's capital gain attributed to movements in the currency in which the asset was denominated.

Deductible : expenses that can be offset against assessable income. Some contributions to superannuation funds are deductible to individuals.

Defined Benefit Fund : a superannuation fund which defines the member's retirement benefit as a multiple of their salary. The multiple is usually based on the member's period of service and is not linked to contributions made over the period of employment. The opposite to a defined contribution or accumulation fund.

Defined Contribution Fund : see accumulation fund.

Derivatives : securities that derive their value from another physical asset, also known as synthetics. Examples of derivates include futures and options.

Distributions : income payments from managed investments. Such payments comprise a share of any net income and realised capital gains earned by an investment over a financial year. The components which generally make up a distribution are profits from the sale of assets, income and currency gains.

Diversification : spreading an investment over a range of asset classes, sectors and regions with the aim of reducing risk. As the old saying goes "don’t put all your eggs in one basket".

Dividend : payment to shareholders from a company’s after-tax earnings.

Dividend Imputation : tax already paid by a company is credited to individual shareholders when a dividend is paid. Want to know more about shares and the benefit of dividend imputation?

Dollar Cost Averaging : One of the benefits of investing a set amount of money, at regular intervals, over a long period of time. This means an investor could gain an advantage from rises and falls in the investment price, buying more when the price is low and less when the price is high.

Easy Investment Plan : a BT term describing a regular periodic investment plan whereby the investor makes use of the principle of Dollar Cost Averaging.

Eligible Termination Payment (ETP) : a payment from a superannuation fund, approved deposit fund or employer to a person upon resignation, retrenchment, disablement, death or retirement. Sometimes such payments can be taken in cash, at other times they must be rolled over.

Equity : (1) a share investment or (2) the part of an asset owned by an individual over and above any debt against the asset.

Financial adviser : an individual who is licensed to provide investment advice to others, for a fee.

Fixed Interest securities : see Bonds.

Franked Dividends : dividends on shares which include an imputation credit.

Fund : see managed investment.

Futures : a derivative investment, an obligation to buy or sell a specified quantity of an underlying asset at some time in the future, at a price which is agreed when the contract is executed.

Gearing : (1) a measure of the debt ratio, which is the amount of borrowing compared with the equity in an asset. (2) borrowing to invest, such as when purchasing a house using a mortgage or purchasing a share portfolio using a margin loan.

Growth assets : a term given to assets such as shares and property which are expected to provide strong investment returns over the long term.

Growth fund : an investment fund which is predominantly invested in growth assets.

Hedge Funds : an investment fund where the fund manager is authorised to use derivatives and borrowing to provide a higher return.

Hedging : undertaking one investment to protect against the potential loss in another investment. Options and futures are often used to hedge an investment.

Imputation credit : taxation credits which are passed on to shareholders who have received franked dividends from holding shares or managed share investments.

Income : regular payments from an investment derived from interest on cash or bonds, dividends on shares, or rent from properties.

Inflation : see Consumer Price Index.

Interest : the return earned on money which has been invested or loaned, the price paid for its use.

Invalidity component : Payments from a superannuation fund or employer made after 30 June 1994 for disability.

Investment : an asset purchased with the intention of producing capital growth or income, or both, for the owner.

Lifetime pension or annuity : a retirement income investment where an individual invests their superannuation or other money and receives an income periodically. The capital is not accessible, and there is little income flexibility. The payments are guaranteed to be made for the person’s lifetime.

Liquidate : to sell an investment or to convert an investment into cash.

Listed security : a security which is bought and sold via an exchange, such as shares on the stock exchange.

Loss : occurs where the sale price of an asset is less than the initial cost.

Lump Sum : a superannuation benefit taken in cash rather than being rolled over to a pension or annuity.

Lump Sum Tax : tax payable on a lump sum benefit payment from a superannuation fund.

Managed investments or funds : a unit trust which allows investors to pool their money with that of other investors so that the fund can buy a wide range of investments. These investments are managed by a professional fund manager who makes the investment decisions.

Management Expense Ratio (MER) : a ratio expressing the management, trustee and certain other expenses of a managed fund as a proportion of the net asset value of the fund.

Margin loan : a line of credit established for the purpose of investing in shares or unit trusts, often to make use of negative gearing.

Maximum Deductible Contribution (MDC) : the maximum amount per annum allowed to be contributed into a superannuation fund for which a tax deduction is allowed. The limit is dependent on your age.

Money Market : a market where short-term securities, such as promissory notes and bills of exchange, are traded. Securities in the money market all have terms of 1 year or less.

Negative gearing : purchasing an investment with borrowed funds where the interest on the borrowing exceeds the income from the investment.

Net asset value : the value of a company, or managed fund, which is the assets less liabilities.

Options : a derivative investment, giving the holder an option to buy or sell a specified quantity of an underlying asset at some time in the future, at a price which is agreed when the contract is executed.

Pension : a regular income stream paid to an individual, either by the Government (such as an Age Pension) or from a superannuation benefit.

Pooled investment : an investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf. Also known as a unit trust or managed investment.

Portfolio : the full range of an investor’s, or managed fund’s, investment holdings.

Post 1983 component : that part of a superannuation benefit that relates to employment service, or superannuation fund membership, since 30 June 1983. See How super is taxed for more information.

Pre 1983 component : that part of a superannuation benefit that relates to employment service, or superannuation fund membership, before 1 July 1983.

Preservation : a requirement to retain superannuation benefits within the superannuation environment until a specified condition has been met. Under current laws most benefits are compulsorily preserved until a person has retired or reached a certain age (between 55 and 60).

Profit : occurs when an investment appreciates in value and is sold, or realised. Also known as a realised gain.

Property funds : in a managed investment the term property generally refers to investments in property securities - property trusts listed on the stock exchange. Funds which invest in property securities allow diversification by investing across a range of different property sectors such as commercial, office, industrial, hotel and retail properties. A property securities fund generally invests in property trusts that are listed on the share market, or in property-related companies.

Prospectus : a legal document lodged with the Australian Securities and Investments Commission which details how the fund operates, outlining the nature of the fund(s), how to invest and what to expect from the investment.

Realise : to sell an investment.

Realised capital gain : when an investment is sold and a capital gain is realised.

Redemption/redeem : to withdraw, or sell, an investment.

Redemption price : the price at which an investor can withdraw their units from a fund or trust.

Reinvest : where income from an investment is used to make an additional investment, generally at no fee, increasing the potential to receive higher capital growth and distributions in the future.

Return : the amount of money received from an investment each year. Can be comprised of income and/or capital growth and is expressed as a percentage.

Risk : the variability of returns. Generally, the higher the level of risk an investor is prepared to accept, the higher the potential return over time may be.

Rollover/rolling over : the transfer of an eligible termination payment within the superannuation environment between superannuation funds, or from a superannuation fund to a pension or annuity.

Salary sacrifice : an amount of pre-tax salary that an employee decides to contribute to super or allocate to a fringe benefit instead of taking it as cash salary.

Sector : a group of securities with common characteristics, such as resource sector companies or financial companies.

Security : (1) an asset traded on a financial market, such as shares or bonds or (2) an asset pledged to ensure the repayment of a loan.

Shares : represents ownership in part of a company. When you buy a share in a company you become a joint owner of the business and share in the future of that business. Also known as an equity. Want to know more about shares?

Spouse contribution : a contribution to a superannuation fund from a spouse. Taxation offsets may be able to be claimed for such contributions.

Stockbroker : a person who buys and sells securities on behalf of others in return for brokerage or commision.

Superannuation : a tax effective means of putting aside money during your working life for use in retirement.

Superannuation fund : a concessionally taxed investment fund for superannuation monies. These funds can accept both ETP’s and contributions. Generally balances cannot be withdrawn until retirement. These can be run by an employer as a company fund, a fund manager as a personal fund or can be self managed by an individual.

Surcharge: superannuation surcharge is a tax paid by high income earners on certain super contributions.

Switching : transferring units between two funds in a unit trust. This may trigger a capital gain.

Synthetics: see derivatives.

Tax deductible : an expense that can be offset against assessable income.

Tax rebate/offset : now known as tax offsets, an amount of money that reduces tax payable.

Trust deed : see constitution.

Undeducted contributions : a term given to after-tax money invested in a superannuation fund, such as investing after-tax salary.

Unit price : the price for each unit of a unit trust. This is calculated by dividing the value of the assets of the trust by the number of units on issue to investors.

Units : a share of a unit trust or managed fund which represents an entitlement to the asset within the fund.

Unit trust : an investment where a number of individuals place their money with a professional manager who manages the total fund on their behalf. Also known as a pooled investment or managed investment.

Unrealised capital gain : occurs when an investment increases in value but is not sold or realised.

Vesting : relates to superannuation, an employee’s entitlement to optional employer superannuation contributions. Vesting is usually expressed on a scale, for example for each year of service employees are entitled to a further 20% of optional employer contributions. This means that after 5 years of service an employee is entitled to 100% of these contributions if they leave the employer.

Yield : the dividend, or interest rate, on an investment expressed as a percentage of the price.