An Introduction to Unlisted Investments

 

Traditionally, Australians have a tendency to invest in cash, in property and in the ASX. That’s not a bad mix, but it’s not the limit of our opportunities in a sophisticated, developed economy. Unlisted and alternative investments are a different class of assets with different advantages, disadvantages and uses in a portfolio. This project is about uncovering what some of those opportunities are, how they work and what you need to know as an investor before making a decision.

Unlisted investments differ from listed investments in a three main ways: regulation, liquidity and different behaviours compared to listed investments. While these differences can be substantial, the same basic rules for investing apply to both listed and unlisted products.

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Difference One: Regulation

While many of these investments fall under ASIC’s regulatory purview, they aren’t covered by the same regulations as equities listed on the ASX. This means that while the product may be advantageous for you as an investor, you need to be aware of the nature of the product, its risks and returns.

Rule One: know what you’re investing in and make sure you understand it.

Difference Two: Liquidity

Unlike listed investments that have an exchange where they can be bought and sold (for our purposes this is usually the ASX), unlisted investments can difficult or impossible to dispose of or exit before the end of their stated term. This varies among product types: bond funds, for example may be comparatively liquid compared to some forms of peer to peer lending.

Generally, illiquid investments make up for this inconvenience by paying the investor a “liquidity premium”. If you’re prepared to tie up your money for an extended period, you can expect to receive a higher rate of return in general. This can be one advantage of unlisted investments, but it needs to be counterbalanced by the risks of illiquidity. In short: what works for your investment plan?

Rule Two: know what your rights and restrictions as an investor are for any product you invest in.

Difference Three: Unlisted Investments May Behave Differently to Listed Ones

You may find references to “zero” or “low” correlation between unlisted and listed investments. Tread cautiously with statements like these. It’s true that stocks on the ASX may follow similar patterns over time and unlisted investments may follow different patterns. This is a useful fact when diversifying. But it would be naïve to think that unlisted or alternative investments are going to make your portfolio bulletproof or that they aren’t subject to risk. There are still macroeconomic events that can affect both listed and unlisted investments.

Likewise, you may also hear that unlisted investments are less volatile than listed investments. It’s true an unlisted investment’s price may change less in a short time frame than a listed investment. Again, this is not something to be naïve about. Whereas stocks on the ASX may trade up or down day to day based on events in foreign markets, unlisted investments tend to absorb these effects over time. However, that doesn’t mean that unlisted investments are not subject to volatility at all. They may have lower day-to-day volatility, but like any product in an open economy, the price structure will absorb economic and firm-specific changes over time. These changes may be fast or may be slow: it all depends.

Rule Three: diversify, but don’t assume that alone will make your portfolio bulletproof.

An Introduction to Our Project

Investment needs differ with each investor. Some investors are looking for growth, others income, sometimes both. We’re going to divide this project into three stages: income generating investments, income and growth generating investments and then finally growth-only investments.

We’ll be picking particular products to profile not because “these are the ones you should buy”, but because we believe they offer a good example of what’s possible in a class of investments that hasn’t been well-explored by ordinary Australian investors so far. There are plenty more products out there in each class: this is just a starting point.

We’ll also be providing a general overview of each of the main types of products we cover. You can use these to inform your own research into both our profiled products and others you may be interested in.

Our profiles are based around the issues we feel are important and in each one we’ll offer you a jumping off point to keep researching the product more thoroughly before you make your own decisions.

To offer a brief summary of our project: there’s no such thing as a free lunch. While some of the investments we’ll profile offer substantial returns, they are also offering a substantial suite of risks. Bear that in mind when beginning your own research.

If you’ve gotten this far, I should introduce myself. My name is Steph de Silva and I’ll be preparing the analysis and research that goes into this project. I’ve worked for the World Bank and the University of Sydney in the past, but these days, I work largely as a data science or economics consultant. I also teach for Swinburne’s online masters program in both economics and financial statistics. I have a Ph.D. in econometrics: the numbers that go into in business, economics and finance are my main interest.

One thing I want to make abundantly clear is that there is a difference between an economist and a financial planner. It’s pretty similar to the difference between a scientist and a doctor: two smart people, but you’re only going to let one of them near you with a scalpel. Likewise, you don’t want financial advice from an economist, so I’m not going to give it. I’ll be talking about markets, structures, returns and trends. With that information, you should be well placed to research and make decisions for yourself.

If you’re ready to get started, you can find our first analysis here on income generating investments.

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Unlisted Gems: Updates and Recaps

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Unlisted Gems: The Wrap Up

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Interest Rates Rising: Unlisted Gems

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