Your Money & You – March 2012

Investing in Infrastructure

There are many ways to invest your money. One way is to invest in infrastructure such as roads, railways or airports. Before you do, make sure you understand the risks and that the investment suits your goals.

ASIC has recently released benchmarks to improve the disclosure of information to investors by infrastructure entities about important aspects of the investment, such as payment obligations and financial forecasts.

With infrastructure investments you put money into a single infrastructure asset or multiple infrastructure assets, such as the building and management of toll roads, telecommunications facilities and gas pipelines. Your money is channeled into these assets through infrastructure ‘entities’.

Key features of investing in infrastructure

Before you invest in infrastructure assets you should be aware how they differ from other long term investments, such as shares. Some key features of infrastructure assets include:

• Infrastructure entities may have a contractual right to operate an infrastructure asset for a set time period, rather than buying the asset outright.
• Some infrastructure entities own less than 100% of their infrastructure assets, which affects their control over their assets.
• The construction and development of infrastructure assets can take many years. It may take a long time for the investment to generate cash flows.
• Infrastructure entities often rely on forecasts of the future use of an asset. If the assumptions behind these forecasts prove incorrect, the value of the investment may decrease.
• As infrastructure projects are often unique, it can be difficult to compare one with another. This can also make your investment difficult to sell.
• Certain types of infrastructure are subject to government regulation. For example, the prices that some entities can charge are set by the government.

ASIC’s benchmarks

Before investing in infrastructure make sure you understand the risks. This means reading all disclosure documents carefully. ASIC’s benchmarks for infrastructure entities outline the key information the company should disclose to you so you can assess these risks. These benchmarks relate to important aspects of the investment, for example:

• Corporate management: Is the structure designed to maximise returns to investors, or to the entity or its operators? Are payments to management linked to the performance of the entity?
• Forecasts: Are the entity’s cash flow forecasts checked by the directors and auditors? Does the entity disclose any forecasts following acquisition or development of an asset?
• Payment obligations: Are your units or shares fully paid, or could you owe money later? Are all units or shares treated equally – for example, do all investors have the same rights? If the entity is a unit trust, where is the money you are paid coming from and is this sustainable?

Smart investing

No one can guarantee how an asset will perform and you may lose some or all of your money if something goes wrong. Always make sure your investment strategy is well diversified.

For more information, see ASIC’s new guide, Investing in infrastructure?, available from www.moneysmart.gov.au

Greg Medcraft
Chairman
Australian Securities and Investments Commission

Have diversified portfolios had their day?

Diversification involves investing across the main asset classes.

It’s a long established and effective strategy which basically says you shouldn’t put all your eggs in one basket. It has regularly lead to higher returns for lower risk.

For diversification to work properly the different asset classes have to move in different directions at the same time.

However since mid 2007 many asset classes began to move in the same direction at the same time. For example listed property trusts have been taking their cue from the general sharemarket.

And movements in Aussie shares have followed the lead of the US. However Australian shares haven’t performed as well as the US in recent months. It’s worth noting that the profit level of US shares has rebounded strongly.

When confidence returns to global financial markets returns we’re likely to see the benefits of diversification become re-established.

Is now a good time to fix your home loan interest rate?

About 90% of Australian home mortgages have interest rates that can be varied during the life of the loan.

That is the interests are variable not fixed.

It’s stating the obvious to say that when interest rates vary, spending patterns will also vary. The sensitivity of borrowers spending patterns caused by changes in interest rates overwhelms any other impacts such as higher interest rates paid to people with savings.

This means that monetary policy is very effective and borrowers don’t have to fear interest rates returning to the extremely high levels experienced in the late 1980s.

Some commentators expect monetary policy to carry a heavy load in coming years, particularly given the inflexibility of fiscal policy.

The financial markets have priced in several reductions in Australian interest rates before the end of 2012. As a result the interest rate banks are charging on fixed rate mortgages are at unusually low levels.

Which is why some market commentators are arguing that now might be a good time to consider fixing the interest rate on your home mortgage. In fact they go so far as to say that the best time to fix your mortgage is often when financial markets expect further reductions in official interest rates.

If you are thinking of fixing your home loan interest rate then you need to make sure you work out the cost of changing your mortgage.