What are the Aware Investment Funds?

The Aware Investment Funds are investment funds outside of super. We offer eight funds, from conservative to more growth oriented.

Investment Fund options

Read more about it here


 

What is a distribution?

Our Investment Funds aim to generate income, or profits, from their investments. This income can come from different sources depending on what the fund invests in – dividends from shares, for example, interest, or capital gains when investments are sold.

As an investor, income made by the investments of the Fund is paid to you as a distribution.

Your distribution is in proportion to the number of units you hold in the Fund. You can take your distribution as cash or re-invest it into the Fund.

 

When are distributions paid?

When and how often you receive your distribution depends on which Investment Fund you are invested in and the types of investments in the Fund.

Some Investment Funds distribute quarterly, whereas others distribute every six months. For example, Australian and International Equities Funds, which invest in Australian and international shares, distribute every six months. This is because most companies pay dividends only once or twice a year, so income is unlikely to be available for distribution on a quarterly basis.

 

How much will I receive?

How much you receive depends on the kinds of investments in your Fund, but also on other factors. We summarise below the key factors that influence how much your distribution will be.

 

Company dividends

Investments in equities (shares) are investments in companies. This means that the primary contributor to distributions from investments in shares is the dividends the companies pay to their shareholders.

The amount a company distributes as a dividend depends on a range of factors. The most important of these are:

  • The company’s earnings: A company’s earnings are determined by how well the company performs, the overarching economic conditions (including interest rates), as well as the regulatory environment. The company’s earnings directly impact the level of dividends it pays to shareholders.
  • Company dividend payment policy: The dividend payment policy spells out when dividends are paid and how much of its earnings a company pays out, and how much it retains to re-invest in the business.

 

Global interest rates

Global interest rates impact returns from investments as well as distributions from companies.

When interest rates are low, investors receive lower levels of income from certain types of investments - like fixed income securities (bonds) or cash investments such as term deposits or money in the bank. On the flipside, low interest rates mean it costs companies (and individuals) less to borrow money. For companies, the lower cost of borrowing can translate into lower costs overall and higher earnings, and potentially more money to distribute to investors.

The opposite is true when interest rates are rising. Investors receive more income from their investments, but the cost of borrowing money also increases.

Higher interest rates impact all companies (and individuals), but particularly those with higher levels of debt, because it costs more to pay off the debt when rates are high. Because it costs more to borrow when rates are higher, this can translate into higher costs and lower earnings, which can mean less to distribute to investors as dividends.

Lower dividends from companies means lower distributions to investors, and vice versa. If your Investment Fund invests in shares, your distributions will be affected by company dividend levels.

 

Capital gains or losses

When we sell investments in an Investment Fund, we make a gain or a loss.

Capital gains and losses fluctuate during the income year (the financial year), and how these gains and losses impact distributions depends on the timing and number of sales of investments during the financial year.

Any capital gains realised during the year are distributed at year-end (30 June) when the gains have been confirmed. This can mean that June distributions are larger than distributions for other periods throughout the year.

 

Foreign exchange movements

How do foreign exchange movements affect an investment?

When we invest, we buy the investment in the local currency. For example, when investing in Australian shares, we buy them in Australian dollars. In this case there is no currency risk.

When investing in overseas shares – US shares for example – we buy the investment in US dollars. This exposes our investment to foreign currency risk because the US dollar is affected by changes in exchange rates.

We illustrate this simply in the diagram below. In this case, our US shares are priced at US$50 each. If the exchange rate is A$/US$ 0.75, the value in A$ terms is A$66.67. If the exchange rate falls to A$/US$ 0.70, the share value in A$ terms is A$71.43. The shares are now worth more in A$ terms.

Currency risk matters because the change in value of overseas investments directly affects both distributions and capital gains (or losses) on the investment.

 

 

What is foreign exchange hedging?

Foreign exchange (FX) hedging is a strategy aimed at limiting foreign currency risk or losses in investments.

FX hedging aims to protect your investment from changes in the value of foreign currencies. It’s a bit like taking out an insurance policy because it allows investors to ‘hedge their bets’ against currency risk.

Foreign exchange hedging can result in a gain or a loss for the Investment Fund, depending on which way currencies actually move. When it results in a gain, this gain helps offset the negative impact on returns of a fall in the value of a foreign investment. When it results in a loss, this loss is offset by gains in the value (in currency terms) of Australian investments.

Exchange rates fluctuate during the year, so foreign exchange hedging gains are not distributed until year-end (30 June) when the gains have been confirmed. In the example diagram below we compare the value of a foreign property investment when the A$ is unhedged with the value of that property when the A$ is hedged.

 

 

Futures

What are futures?

Futures are financial contracts based on an underlying asset, such as an index or commodity. They can be bought or sold and can be used for gaining exposure to the underlying asset or to hedge exposure to an asset already owned.

For example, if a business needs to buy oil every month, it may use a futures contract to lock in the price payable for the oil so it can better control its cash flow and costs.

Why do we use futures?

We use futures for a variety of reasons.

  • Futures allow us ‘invest’ or gain exposure to assets (or investments) quickly and easily without having to buy the actual asset or investment. Purchasing actual assets can take time, so sometimes using futures is a good way of investing (or divesting) quickly.
  • Futures are a good way of locking in the price of an asset so we can ‘hedge’ or protect against adverse changes in the price – in the same way foreign exchange hedging protects against adverse movements in foreign currencies. This helps smooth out the ups and downs of price movements, cash flow, and returns.
  • In the same way that foreign exchange hedging can result in a gain or a loss, so too futures contracts can result in a gain or a loss, depending on the actual movement in price of the assets or investments in the contract.
  • Where there is a gain (because the futures contract locked in a higher price for an asset than the actual price at the time of sale), this gain can offset the fall in the price of the asset. Conversely, when there is a loss (because the futures contract locked in a lower price than the asset’s actual price at the time of sale), this loss is offset by the rise in the price of the asset.
  • As the price of underlying assets can fluctuate during the year, any gains from futures are not distributed until 30 June, when these gains have been confirmed.