A comparative case study

This article originally appeared on Aged Care Today Summer 2023

Having the right investment strategy is critical for long-term financial viability and business success.

Here we look at two hypothetical seniors’ living organisations who both had balance sheet reserves of $5 million five years ago. 

One decided to invest in term deposits and the other utilised an investment portfolio. The organisation that chose the investment portfolio took a conservative approach with a 60 per cent allocation in more defensive assets such as bonds and a 40 per cent allocation in more growth-targeting assets such as company shares. 

Over that period, we’ve had several global events that have negatively impacted markets including geopolitical tensions between the US and China, presidential elections, COVID-19 lockdowns, Russia’s invasion of Ukraine as well as soaring inflation and the corresponding rising interest rates, all of which impacted investments.

Term Deposit Only 

As you would expect, the term deposit investor maintained their initial investment of $5 million. They also received $321,000 of income, an average of $64,000 per year; however, this was not evenly distributed. 

Back in July 2018, the Australian interest rate was set at 1.5 per cent which meant the income from term deposits was higher. For the first financial year, an average term deposit investor would have received $109,000; however, as interest rates fell, this dropped, hitting a low of $22,000 in 2020/21. 

Interest rates are now much higher with the current cash rate at 4.1 per cent which means income streams have picked up, but it’s still not at the level of investment markets or inflation.

Conservative Investment Portfolio

The conservative investor in comparison did much better, earning an extra $121,000 of income as well as $542,000 in capital growth. The income was smoother over that period because of the diversification across different income-generating investments.

However, the value of the capital did fluctuate, and this is a common characteristic. It is therefore critical your board gets comfortable with the idea of some capital losses over shorter periods prior to investing. This will help protect you from crystalising losses unnecessarily in the future.

It is also important to note that not all investments are equal. The blend of assets can be changed to meet your board’s risk tolerance. Investment portfolios on the stock market will be affected by market downturn, but then bounce back over time.

The rise and fall of the value of the portfolio depends on the proportion that is in growth assets, with conservative investment portfolios being less affected, with 40 per cent in growth assets. 

If we take the Global Financial Crisis as an example, Australian equities had a peak-to-trough loss of almost 50 per cent. In comparison, the conservative portfolio only fell by 10 per cent. 

It is important to note that while equities are more volatile, they also have much higher expected returns over the longer term. They therefore have an important role to play in most investor portfolios and it’s why the longer you intend to invest, the higher allocation you can look to include. It is then a question of whether that level of risk over the shorter term is tolerable.

Get the Right Advice

At Perpetual Private, our expert advisers can help you ensure the assets on your balance sheet are put to work in a way that is suitable for your organisation. We specialise in investment governance and management for senior living organisations and have been earning the trust of our clients for more than 130 years. 

We pride ourselves on our long-standing client relationships and will always strive to reassure you that your assets are in safe hands so that you can focus on what you do best.

Anthony Hamawi, Manager, NFP and Aged Care, Perpetual Private www.perpetual.com.au/seniorliving