In the breakdown of assets underlying Media Super’s investment options, 'Fixed Interest' is referred to as 'Fixed Income'. For details about the sector allocations of Media Super's investment options that include Fixed Interest, refer to the individual Options.
what is fixed interest?
When an investor lends money to governments, semi-government bodies and corporations, interest is paid at an agreed rate which is fixed for the term of the loan. These investments are known as bonds or fixed interest. Fixed interest investments can be held until they mature or they can be traded at any time before maturity. If they are sold before maturity, the price will depend on the interest rate at the time. Returns from fixed interest investments occur from regular interest payments and any change in value caused by movements, either up or down, in interest rates. Fixed interest is usually a more stable investment than shares, but this depends on the investment environment.
what are the risks of investing in fixed interest?
Interest rate risk is a significant risk to Media Super’s Fixed Interest portfolio, as the majority of the sector’s return comes from an income stream, and changes in interest rates can have a positive or negative impact on the value of investments.
The Fixed Interest portfolio is exposed to market risk (i.e. the risk that fixed interest markets fall in value). Because of this, over short-term periods, the return on the portfolio may not exceed inflation (inflation risk) and the returns on this portfolio could be negative. However, the volatility of returns of fixed interest markets is generally lower than for shares and property markets, therefore market and inflation risk are less of an issue for the Fixed Interest portfolio compared to the Shares and Property portfolios. Also, diversification by investments in a range of different overseas markets reduces the overall currency risk, market risk and, consequently, inflation risk.
Some of the investment managers in Media Super’s Fixed Interest portfolio may use derivatives from time to time, so derivative risk is a factor, but this risk is controlled by limits imposed on their use, and the risk is likely to be small at the total Fixed Interest portfolio level. Individual investment risk is present, although it is controlled by significant diversification of the underlying investments. Some of the managers that Media Super employs may invest in hybrid instruments such as convertible securities.