Tuesday 19 August 2014 by Elizabeth Moran Opinion

Common sense investing – no need for prayers

This article suggests things to consider for smaller not-for-profits when setting up an investment mandate and three popular bond choices. 

A custodian who invests funds on behalf of others, or for their benefit, is in an extraordinarily trusted position. They are expected to invest wisely and are accountable to a wide group for their actions.

Councils, church and religious groups, schools, universities, charities and social clubs are examples of groups that at various times can hold very large sums of cash and, like individual investors, their aim is to maximise returns while minimising risk. Above all, these investors want to preserve capital. A poor investment decision and subsequent losses could end up on the front page of the newspaper and goodwill from members or next year’s donations vanish into thin air.

In 2010, the Productivity Commission estimated there were about 600,000 not-for-profit organisations in Australia. Currently there are also around 23,000 charities which the ATO describes as “deductible gift recipients”, most of which are also not-for-profits.

Many of these institutions have significant allocations to bonds which ideally suit their objectives. Bonds have known interest payment dates and a maturity date when investors can expect capital will be repaid. Bonds can pay a fixed or floating rate of interest or can be inflation linked. They can range from very low risk such as Commonwealth and state government bonds right through the credit risk investment spectrum. Practically all bonds issued in the Australian market are rated “investment grade” and are very low risk.

The larger and more financially astute not-for-profit organisations will invest in bonds according to their investment mandates which provide a guide as to what they can invest in. For example a mandate might require a minimum Standard and Poor’s credit rating of BBB or even higher in the “A” range.

Smaller, less financially literate organisations without a mandate can draft their own set of guidelines which might include: the investment portfolio objectives including target returns; approved investments or asset classes; access to income and redemption of investments, reporting and review requirements as well as ethical and social criteria.

Savings held in authorised deposit taking institutions that qualify for the government guarantee will provide absolute peace of mind. However, there is a lost opportunity to earn greater returns from slightly higher risk investments that could provide more funds for the not-for-profit cause.

Three “A” range credit rated securities that might be appropriate for not-for profits are:

  1. National Wealth Management, a subsidiary of National Australia Bank, a fixed rate bond with an expected maturity date of June 2016. The bond has a yield to expected maturity of 4.30 per cent and income for the next year of 6.48 per cent.
  2. Insurance Australia Limited, a subsidiary of IAG, floating rate bond with an expected maturity date of March 2019 with a yield to expected maturity of 4.92 per cent and projected income of 5.30 per cent.
  3. Swiss Re, a large Swiss Reinsurer, fixed rate security with an expected maturity date of May 2017 with a yield to expected maturity of 4.81 per cent and a high income of 7.12 per cent.

The National Wealth and Insurance Australia Limited bonds are available from $50,000 and the Swiss Re from $100,000. Learning about and understanding all of the low risk options available to not-for-profits will help you invest with confidence and maximise returns.  

Disclaimer

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.