Investing in 2018 – key assets to consider beyond cash and shares
Many investors are firm believers in holding on to traditional assets like stocks and bonds in their investment portfolio for the long haul. But, as times change, it may be beneficial to adjust your investment mix to reflect your financial goals, risk tolerance and life stage. Given the unpredictable nature of markets, it's a good idea to review your asset allocation to ensure you have the right diversification strategy in place. Investing across a wider range of asset classes—and being diversified both among and within different assets—is a smart way to hedge against market risk – and it’s not too late to pivot your portfolio.
Investing in a diverse variety of quality asset classes may help you sustain your portfolio during times of uncertainty and instability, such as we’re experiencing right now. It’s important to also hold cash within that well-diversified portfolio. Cash provides a buffer against portfolio volatility, flexibility to cover unexpected expenditures, and capacity to exploit opportunities across asset classes as they come to light.
At Dixon Advisory, we tap into the combined global expertise of our Investment Committee to guide our investment approach. Infrastructure, some segments of the property market such as Australian commercial and US residential, private investments and diversified Listed Investment Companies (LICs – typically operating similar to a managed fund but with assets held within a company and listed on the stock exchange) are all core to our diversification philosophy; especially for trustees investing for retirement through self-managed super funds (SMSFs). In our view, there are three sectors that could be helpful to review when considering risk mitigation and your own diversification strategy.
1. Look long-term with infrastructure and renewables
If you’re after defensive characteristics and long-term cash flows, consider infrastructure. These assets allow you to become a part-owner of the utilities and facilities providing essential services and helping drive economic growth. Your investment is contributing to the provision of essential services like electricity, sewerage, transport, rail, airports or hospitals. Infrastructure investments typically provide certainty through exposure to assets that boast long lifespans, low ongoing operational costs and secure contracts, often with inflation-linked pricing.
Renewable investments are particularly interesting. Technology is transforming the economics of solar energy – photovoltaic capacity costs have significantly dropped while grid parity is driving adoption, enabling investments across the full solar value chain. One key advantage is the minimal operating costs once the solar panels are producing energy – fuel for a solar asset is free and unlimited. These are also future-focussed assets that respond positively to shifts in sustainability measures and help address climate change.
As part of a diversified portfolio, infrastructure can provide many benefits; from lower volatility to helping with inflation protection given the nature of the underlying contracts. Solar, led by solar plantations and advances to energy storage technology, can also be an attractive sustainable infrastructure investment opportunity.
2. Expand your property horizons to commercial and international
Most investment portfolios include exposure to Australian residential property – and while it has a good track record, recent valuations indicate growth is on the decline. In our view, many investors are too heavily weighted to domestic residential property, either directly through their own home and investment properties, or indirectly through bank shares or the broader share market.
Australian commercial property can provide a conservative diversification opportunity – neighbourhood shopping centres offer defensive cash flows (if focused on stores where economic volatility has a reduced impact on demand, like supermarkets – people always need to eat) and select office buildings in growing markets. Sydney’s commercial property market is buoyant with offshore investors driving demand and, while CBD assets are richly priced, there are still opportunities in some niche and fringe markets.
Diversifying property interests with international residential markets such as the US is also something to consider. You could be part of the world’s biggest economy and indirectly own real assets with some favourable long-term dynamics – specifically low borrowing costs, strong rental yields and robust tenant demand with significantly greater market depth than Australia.
3. Get selective in the private investment market
We believe exposure to select private investments can provide more risk-tolerant investors with opportunities for long-term capital growth. This involves investing in private companies that are less well researched than their public counterparts. These businesses can often be purchased at more attractive valuations and may have greater growth prospects than listed equities.
Private investment returns have historically demonstrated low correlation with public equities and fixed income, and have, on average, tended to outperform listed equities. However, private investments can involve more risk, and given the need for specialist knowledge in this space, it is best to invest alongside a professional investment manager.
Given its more positive economic outlook and significantly larger population, the US market provides a much deeper pool of opportunities than Australia. We prefer small and mid-market private investment managers who provide capital to help already growing businesses expand, and who use lower levels of leverage. Investing in these smaller private companies can provide exposure to the growth engine of the US, rather than businesses focusing on export markets like many large-listed stocks.
A lot of investors typically focus on well-performing dividend shares, but with current valuations looking full by historical standards, it’s worthwhile to consider other options. If you’re thinking about diversifying beyond shares, the previous categories are a good starting place, in our view.
All investments remain subject to risks and uncertainties and a well-balanced portfolio will likely have the best ability to help you maintain purchasing power while providing good returns over the long run. Speak to your adviser about the type of assets that can help diversify your portfolio and position your investments to ride through the risks of a more tumultuous period ahead.
To find out more, get expert strategies to help boost your retirement income and make your investments work harder, attend a complimentary Dixon Advisory investment seminar.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.