Carolyn O’Reilly is a senior adviser with Perpetual. She says clients who are the beneficiaries of an inheritance are increasingly asking about how they can access socially-responsible investments. “It’s an emerging trend and Perpetual is designing investment portfolios to meet those needs,” O’Reilly says.
Allocating money to companies that do good for the environment can also offer better returns.Getty.
Kate Blake,also a senior adviser with Perpetual,concurs. “People are showing more of an interest in ethical investing,which is great,” she says. “Research shows you can still obtain just as good or even better returns by investing ethically. This involves filtering out companies that do the wrong thing by the environment,for example fossil fuel,tobacco,or gambling businesses. It also means allocating money to companies that do good things for the environment and for society.”
According to the Responsible Investment Association of Australasia (RIAA),responsible share funds have performed better than mainstream Australian share fund benchmarks over one,five and 10 years.
Alternative investments are also piquing investors’ interests after an inheritance. O’Reilly says:“It's an asset class that typically has low or no correlation to share markets. They smooth out the volatility in a portfolio,which can be attractive.”
Alternatives include private equity,hedge funds and infrastructure investments.
They have also become increasingly attractive in an era of low interest rates,in which cash and term deposits are only generating insipid returns. Research from Perpetual Client Insights and Analytics released in September last year shows more people are now choosing to invest their funds after receiving an inheritance (31 per cent),instead of putting it in a term deposit (15 per cent).
More people are looking for better ways to invest rather than keeping an inheritance in cash.Getty.
Kyle Lidbury,head of investment research in Perpetual Private’s investment team,says investors need to look further afield than just the Australian stock market when constructing a portfolio.
“Australia is a concentrated market – dominated by banks and miners. Overweighting a portfolio to Australian assets means investors get little exposure to global leaders in fields such as technology and pharmaceuticals and it significantly limits diversification – which can mean investors are taking more risk than they need to. Investors can now easily diversify their portfolios by investing in global equities. And outside of equities,they're looking for alternative ways to generate real returns,” says Lidbury.
“Investors are increasingly keen on private and more illiquid markets. These are places where you can generate returns that aren't necessarily linked to traditional equity market returns,but will still provide you with a source of growth returns,” he adds.
Lidbury says combining alternative assets with traditional assets will deliver a portfolio with more resilience. “If you've inherited a large sum of money and you have a long-term investment objective,you can take some illiquidity into your portfolio. This provides additional return as well as a smoother ride through the cycle,because the investment portfolio will be more diversified.”
Different strokes
While ethical and alternative investments are increasingly popular,the right portfolio construction after you have received a windfall such as an inheritance will depend on your risk profile and your stage of life.
O’Reilly says:“An inheritance is an opportunity to give you and your family financial security. So it’s really important to have a diversified portfolio that meets your risk profile and achieves the investment outcome you need.”
There will be less of a need to generate income from the portfolio if you’re still working and your expenses are being met by your salary. But there will typically be more need for income from the portfolio if you're about to transition to or are in retirement. “Most investors want some capital and income,but it does depend on your life stage,” she adds.
Lidbury agrees,and notes the right mix of assets will depend on your short-term versus long-term requirements.
“When they receive money people just think,‘Okay,I'll go and invest’. But this needs to be done in conjunction with a robust financial plan. This will help you work out the timeframe around when funds are required,which will determine your capacity for risk as well as liquidity needs. The longer your timeframe,the more exposure you can have to risk and growth assets,as you can ride out short-term market volatility and focus on the long-term.”
Blake suggests:“We want to make sure you're putting the money in investments that will give you the most appropriate level of risk and return. We don't want to invest too aggressively for someone who's conservative;we want to make sure everything lines up with the client’s goals and objectives.
After an inheritance it’s important to take time deciding the best way to allocate the funds and not make any decisions too soon.
Blake recommends finding an adviser you trust and who has your best interests at heart,taking into account social security,estate planning,insurance and tax.
“There are so many more factors to consider than just how to invest the funds. This can be a life changing opportunity,which is why it’s so important to find the right people to help you navigate it.”
An inheritance over $1 million gives you options to invest in new ways – from responsible investing to alternatives – but every investment should be part of a diversified financial plan. One that takes your life stage and risk profile into account. To get you started,Perpetual has addressed six financial questions worth considering when you receive an inheritance. With the right advice,you can turn your once in a lifetime into the rest of your lifetime. Find out more: