Is the formula for investment success the same?

By Ian Irvine, ASX

May 24 2016
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In these volatile times, and with the retirement horizons for Australians continuing to grow, asset allocation of investment portfolios needs to come under the microscope.

Is the formula for investment success the same?

Recent and continuing volatility in equity markets may have even further extended the ‘comfort in cash’, with many SMSF trustees and direct investors holding what may be considered a higher proportion than they prefer in excess cash.

How SMSF trustees or direct investors have invested in the past has been relatively straight forward. Many have been comfortable to hold higher risks assets such as shares that deliver good returns along with franking, trading this off this with a proportion held in lower risk cash and TDs that are providing declining returns as interest rates trend down.

However, the usual destinations are a little out of favour and returns from cash and TDs are not delivering, so it’s imperative that investors focus on getting the recipe right for their portfolio.

The right mix

Diversification is about having assets in a portfolio that behave differently allowing some asset classes to ride out the difficulties being experience by others. This is referred to as ‘negative correlation’ and it’s about not having all investments in the same basket performing the same at the same time.

Asset allocation is about how much of a portfolio should be exposed to which asset classes. Generally this is determined in percentage terms and could, for example, be what percentage of a $1 million portfolio to hold in Australian equities, global equities, infrastructure, property or cash?

Asset allocation will vary individual to individual depending on risk tolerance, investment objectives and possibly age, though not everyone of an age will have the same risk tolerance or investment objectives.

Portfolio construction is about, having decided on the right asset allocation for the portfolio, which products will be used to gain the chosen exposures.

Stepping outside your comfort zone: Is there more than Australian equities?

SMSF trustees and investors have been very good at managing their domestic equity exposure. The attraction to use ASX as a source for investment products may have created a problem in itself by limiting the choice of asset classes to what the Australian equity market does well – banks and financials, mining and resource companies, a number of retailers and a large telco, with many investors having concentrated portfolios in the top 10, 15 or 20 stocks.

There are a variety of options available for investors and trustees who want to step out of the comfort zone and access other asset classes.

So how do investors and trustees step out of their comfort zone and access other asset classes such as global equities, fixed income and infrastructure?

Exchange traded funds (ETFs), for example, have led the way overseas, providing access to a broader range of assets, and many investors have chosen to use a listed investment company (LIC) to access international or Australian shares – in the latter case, companies that may be a little further along the index into mid or small cap territory.

Investors also now have much easier access to unlisted managed funds than they have in the past. Unlisted managed funds have a number of the characteristics of LICs and ETFs – in particular, they are managed by professional managers who make the strategic and day-to-day decisions.

Through the mFund service, we’ve noted that investors are starting to take notice of assets like fixed income. In fact, fixed income accounts for 50 per cent of inflows for mFund, with two thirds of that being global fixed income.

One of the greatest challenges continues to be affordable exposure to infrastructure in Australia and overseas. By virtue of the nature of infrastructure, by and large you have to have deep pockets invest.

Ian Irvine, head of customer and business development, ASX

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