Waterfall Way Associates Pty Ltd
Suite 607
24 Moonee Street
NSW 2450
(02) 6650 0522
info@waterfallfp.com.au Waterfall Way Associates is an FPA Professional Practice

The Waterfall Way

Shares | Property | Interest Bearing Investments

Diversification of investment assets across the three main asset classes of shares, interest and property is a time-honoured discipline. It provides a means of reducing the impact that disadvantageous, unforeseen movements in investment markets can have on your capital. Our asset allocation is determined initially by a “top down” macro view of the Australian and international economies.  An assessment of key issues and themes influences the allocation between the major asset classes. Further diversification is possible within each asset class by dividing it up into a number of asset sectors. Asset allocation and authorised investments are determined by an investment committee which utilises purchased material and original research sources. This committee meets on a monthly basis.

Investment yield can be in the form of income or capital return.  It is fundamental to our approach that income is the critical element in total portfolio returns. This principle is crucial not only for the interest components of a portfolio but also for share and property investments, which can generate tax-advantaged income streams and the growth necessary to protect capital from the impact of inflation.

Capital will typically be invested in a complementary manner to balance more aggressive components with defensive elements. Our aim is to achieve a reduction in the probability of significant financial loss.

The Waterfall Way investment philosophy and process is then applied to a particular set of client circumstances and strategies in our advice.


This asset class covers investment products which convey ownership of economic entities that produce goods and services. Shares can display significant price volatility. Investment in Australian listed company shares is generally the major proportion of a typical investment portfolio. Listed investment companies (LICs) and exchange traded funds (ETFs) are used in many cases as a conservative means of obtaining market exposure and diversification.  At a sectoral level, we focus on constructing portfolios that incorporate shares in companies operating across the major areas of economic activity. At the specific stock level, we focus on companies which pay fully franked dividend income to shareholders with the prospect of rising dividend income over time in line with increases in enterprise value and with overall economic growth.

Many of our local companies have overseas operations in this global economy. Investment in companies overseas needs to be considered in this light, particularly as investment in shares listed on foreign stock exchanges can also mean increased currency risks (or hedging costs) and taxation inefficiency relative to locally listed companies.



It is significant that property constitutes the physical infrastructure necessary for the continuing operations of the enterprises in which share-related investments are placed.  Typically, these properties are tenanted on the basis of long term leases, thus providing some consistency of income.  Capital expenditure on developing and maintaining the properties gives rise to some tax advantages in rental income. Many infrastructure projects have the same characteristics as property.

Listed property trusts (LPTs) or real estate investment trusts (REITs) including some forms of “stapled securities” are the preferred means of obtaining exposure to property in our recommended portfolios.  LPTs invest in commercial and industrial properties – such as offices, shopping centres and warehouses – which most individual investors would not be able to access directly. The development of this asset class has meant that many Australian LPTs have property holdings in other countries. Managing the level and nature of international property exposure is an important part of our research in this asset class.

It is important to note that while listed property has generated substantial capital gains in recent decades, the rental income stream remains the principal reason for investing in this sector.  Income should increase as capital values grow, but future growth is likely to be subdued, in line with inflation.

For stapled securities, rental income should represent a minimum 85% of distributed income.


Interest Bearing Investments

Interest bearing investments are essentially a loan (or debt) rather than equity (or ownership). A deposit with a bank is a person lending their money to the bank, therefore cash held in a portfolio management account forms part of this asset class.

Economic activity requires the use of credit. The need for governments, companies and individuals to borrow money has resulted in the creation of a vast array of interest bearing investment products. Many of these financial products are heavily structured and difficult to understand. They can also be “high risk” products sold as “low risk” products.

Fixed and variable term interest bearing investments provide a return of capital at the end of the term and an interest rate in the meantime. They will typically be term deposits, annuities, or fixed term mortgages. It is our view that these investments should represent the most secure part of an investment portfolio.

Listed interest rate securities are sometimes called “hybrids” as they have characteristics of debt and equity. They have been developed from the old fashioned preference share and can have quite complex structures in order to produce the desired taxation result for the issuing company. Waterfall Way Associates has developed a disciplined approach to the selection and purchase of these securities to ensure that our clients obtain a fair price for them. Listed interest rate securities have the potential to fall and rise in value and are traded on the Australian Securities Exchange.