The cash investment option and other options invest in cash (deposits with a bank) and Australiandollar denominated money market securities (such as bank bills and promissory notes) that are issued or guaranteed by a government, bank or corporate entity. These securities must have a minimum credit rating of A1 (or its floating rate equivalent) for short-term securities and a minimum credit rating of A1 for long-term securities. Standard & Poor’s (or the equivalent from Moody’s or Fitch if no Standard & Poor’s rating is available) determine these ratings. Interest rate futures, swaps and repurchase agreements are also investible securities in this sector.
Investing in government bonds basically means your money is lent to governments wishing to raise capital. Generally, in return, you receive a fixed rate of interest until the bond matures and the amount invested is repayable. CSC invests in both Australian and international government bonds (such as inflation-linked and nominal, government and semi-government bonds issued by developed and emerging markets). This is generally considered a moderate risk investment as the predominant exposure is to sovereign credit risk (that is the risk that a government cannot or will not honour its existing obligations) and interest rate risk.
Investing in corporate credit means your money is lent to corporate organisations wishing to raise capital through the issue of corporate bonds. Generally in return, you receive a fixed rate of interest, until the bond matures and the amount invested is repayable. CSC invests in Australian and international corporate credit. This is generally considered a moderate risk investment as the predominant exposure is to credit risk (that is the risk that a borrower cannot or will not honour its existing obligations) and interest rate risk.
Investing in Australian shares means you are investing in companies listed on the Australian Securities Exchange. The return on your share investments is your part of the companies’ profits which is paid to shareholders in the form of dividends, and any capital gains or losses from share price fluctuations. Australian companies are exposed to both local and global market fluctuations and as the companies’ fortunes fluctuate, so will the value of any shares. Share prices are affected by market forces and are considered to be one of the more risky investments, but over the longer term may offer relatively higher returns.
Investing in international shares is like investing in Australian shares except that the companies are selected from those listed on international stock markets rather than the Australian Securities Exchange. In addition to being exposed to global stock market fluctuations, investment returns can also be influenced by currency movements. Foreign currency exposure is managed through hedging against Australian dollars. The level of hedging is determined by CSC and may vary from time to time.
Property includes investments in established buildings and properties, for example shopping centres, or buildings under construction. We also invest money in property trusts and property companies, which means we pool your money together with that of other investors, in order to have the scale to purchase a share of very large properties. The investment returns on property come from rent and changes to property values over time. Our property portfolio generally has lower returns than Australian shares as its risk profile is more moderate.
Infrastructure includes investments in essential public works facilities and services in Australia and overseas, for example, toll roads, airports, schools, water systems and power supply. We also invest money in trusts and infrastructure companies, which means we pool your money together with that of other investors, in order to have the scale to purchase a share of very large infrastructures.
Framework for portfolio construction
In constructing a portfolio for each investment option, CSC categorises assets according to their risk profile and their role in diversifying portfolio-level risk. To this end, investments rest within one of four broad asset categories, classified by their diversifying role in the portfolio. The four broad asset categories (corporate assets, real assets, sovereign assets and alternative strategies) are described below.
The corporate assets category comprises Australian shares, international shares, private equity (investment in a company not listed on a stock exchange) and corporate credit investments. These investments earn a real return by financing corporations through public and private equity and debt markets.
The real assets category comprises property and infrastructure investments. These investments earn a real return by financing the building, maintenance, management and trading of real assets, accessed through public and private equity and debt markets.
The sovereign assets category comprises government bonds and cash investments. These investments earn a real return by financing sovereigns and banks, through the holding of government bonds and Australian cash, respectively.
The alternative strategies category comprises investments not included in the traditional asset classes listed above, forming part of the ‘other’ category of assets disclosed within target asset allocations. Examples include investments in hedge funds and multi-asset diversified funds. These investments can have differing levels of risk depending on the actual strategy employed.