Table of Contents
- What is Capital Preservation?
- Which Class of Investors Take on the Mode of Capital Preservation
a. Pension Funds
b. Family Offices
- Typical Asset Classes Favouring Capital Preservation
- Capital Preservation through Real Estate
What is Capital Preservation?
Capital Preservation is a term referring to an investment strategy with the main objective of preserving capital and avoiding losses in an investment portfolio. With a Capital Preservation strategy, investments tend to consist of the safest short-term investment products, such as fixed deposits and bonds.
However, investors using this strategy should also be wary of the impact of inflation on their investments. Low-risk investments are the preferred investment option for Capital Preservation investors, but, as a result, also provide correspondingly lower returns. Investments with a rate of return lower than the inflation rate can still result in a loss of capital (on a inflation adjusted basis) for the investor, despite its lower risk. While this effect may not be immediately noticeable in the short term, it can significantly undermine the value of an investment over time.
Which Class of Investors Take on the Mode of Capital Preservation
Investors embarking on the preservation of capital track tend to have a long investment horizon with a low risk appetite.
Pension funds, which are pools of investment used to fund retirements, tend to follow the Capital Preservation strategy, since the purpose of the fund is to retain the capital as a form of retirement savings. Clients of pension funds do not require the funds to appreciate in value, but rather want to preserve their capital value until their retirement.
Family offices are private companies managing wealth and investments for high net worth families. These family offices generally have over $100 million of assets to manage, and the capital preservation strategy may be used to preserve their wealth for future generations.
On the individual level - one class of investors that tends to pursue capital preservation would be retirees looking to preserve their capital after they stop working and do not have an income flow. Younger investors may also make use of this investment strategy as a way to preserve their capital for a future real estate mortgage down payment.
Read also: What is an Accredited Investor?
Typical Asset Classes Favouring Capital Preservation
Some inflation-adjusted investment options available for investors using the Capital Preservation strategy are Treasury Inflation-Protected Securities (TIPS) in the US or Singapore Savings Bonds in Singapore.
Other popular Capital Preservation options include annuity products, which are primarily offered by life insurance and investment companies. Annuities are typically used by retirees, who contribute to the fund earlier in the accumulation phase, and can then access the funds when they are retired, through regular payouts.
Last but not least, a favoured class for capital preservation is through Real Estate. Real Estate is generally seen as a safe investment option, since property prices tend to grow with inflation. As such, it is a popular option for capital preservation.
As seen in the chart above, Real Estate as an asset class provides stable yet strong returns that are less prone to fluctuations as compared to other investments such as equities and bonds.
Capital Preservation through Real Estate
It would be prudent for investors that are following a capital preservation strategy to consider the real estate asset class. Real Estate investments may be varied depending on its type, and different types hold different levels of risk - ranging from core and core-plus investments to value-add and opportunistic investments.
Investors with a Capital Preservation strategy tend to gravitate towards investing in core real estate properties, which are stabilised and income-generating properties. These investment properties hold the least risk relative to other strategies such as value-add and opportunistic.
The risk associated with core real estate investment can also be further reduced with a diversified portfolio, such as by investing across different geographic markets or in different property types, such as residential or commercial properties.
RealVantage is a co-investment platform that allows investors to co-invest directly in properties around the world, guided by advice from experienced real estate professionals. The carefully curated selection of properties serves to maximise returns for investors, while limiting risk, and the core opportunities presented on the platform provide a good option for investors seeking Capital Preservation.
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