SMSF Investing Education & Strategies

Understanding the capital structure

by Elizabeth Moran
FIIG Securities.

Property investors know and respect the mantra; location, location, location. The key in fixed income markets is where the product sits in the capital structure.

Where an investment sits in the capital structure is crucial in determining whether the return adequately compensates the investor for the risk involved. Equities (or shares) are the highest risk and should provide the greatest returns. In contrast, most debt securities (with the exception of a very small number of hybrid securities) all sit higher in the structure and are safer in the event of liquidation. Generally they are lower risk and offer lower returns.

Including debt securities in investment portfolios lowers volatility.

Figure 1

Risk has a direct relationship with reward. The higher the risk of a security the greater the expected reward. Investing a high proportion of your funds in the highest risk category, equities (shares) can expose your portfolio to loss in a cyclical downturn.

Fixed income securities which are lower risk as they sit higher in the capital structure generally lower the risk of your overall portfolio, helping to preserve capital. See Figure 2 below.

Figure 2

Elizabeth Moran
Director – Education and Fixed Income Research - FIIG Securities.

2011 FIIG Securities Limited. The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or transmitted 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.

FIIG Securities Limited (“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 or 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.