Super and Investments

Superannuation in Australia it seems has traditionally tended to be viewed by most people with an air of caution often due to the previously complex regulations surrounding super. How often have you heard from a friend or college words to the effect of “my super” has performed quiet dismally or “super” seems to be volatile and always up and down for my personal liking.

The first point that people should be aware of is that “Superannuation” IS NOT AN INVESTMENT!

You may then step back and think “well what is it then?”

In fact Superannuation is quiet simply a tax structure! A concessionally taxed savings vehicle. The investment performance you derive from this vehicle is based entirely on where the contributions/benefits are in fact invested. Makes sense doesn’t it! – What people need to understand is that no other tax structure will provide a superior platform for your long term retirement savings to grow – If your super is not performing as well as you would like it to – don’t blame super! Look at the underlying investments.

 The tendency  to associate superannuation with share market volatility lies mainly in the fact that a large percentage of working Australians at some stage will have had super benefits paid into either industry based or retail account based super funds which will offer various levels of exposure to both Australian and International equities. Industry based super funds often focus on lowering costs through various economies associated with their scale and often tend to adopt lower cost more passive investment strategies sometimes known as SAA or strategic asset allocation.

This approach tends to work on the premise that over long periods of time the majority of performance should be attributable to what asset class the investor has exposure to. Although this approach has merit, we believe such an approach can potentially create significant inefficiency in the structural makeup of the portfolio as opposed to a different more active approach otherwise known as TAA or tactical asset allocation.

This method does not seek to increase risk but rather discriminates against certain specific assets or even an entire asset class when certain current market conditions would consider it prudent to do so, hence seeking to optimize the portfolio by considering the current risk return trade off and other market conditions. This can be achieved by utilizing very asset specific and specialized managed funds.

So despite certain Industry fund television ads that imply their lower cost structure will result in a larger nest egg in your retirement, what is not mentioned is that lower costs comes with far less consideration for an individuals specific investment goals that an investment adviser could otherwise establish with a client and implement and maintain on an ongoing basis.

Do I pay adviser fees with such an approach? Yes, so the point to consider here is whether the cost benefit proposition is in your favour (does the extra performance outweigh the extra fees). This will ultimately take time to evaluate but typically an investor can compare the returns from industry fund investment options offering a similar risk level to see if your adviser’s portfolio is delivering you more $$$ after all fee’s are considered (net return).

The results may surprise you!  Should I choose such an approach instead of leaving my benefits in a lower cost industry fund? -

Unfortunately there is no clean cut answer to this as each individual has different requirements, needs and objectives.  So the point here is that you should seek out an adviser to see if you are in a position that by utilizing his services any additional “cost” will be worth undertaking for more potential gain. An adviser will always evaluate your current situation and by law must ensure he has formed a creditable basis for any recommendation he may make to you after a period of learning about you and what you wish to achieve.

Most industry funds will have a very limited range of investment options by virtue of the investment mandates and funds structure and will not always be able to cater for an individuals specific investment goals and strategies as well as providing the specific investment options that allow an adviser to achieve for his clients, the type of portfolio that can be constructed with more sophisticated financial products.  We believe that using more specialized managed funds that focus on specific asset classes or ever geographical regions, will result in two outcomes:1)   Your fees will be higher,2)   Your long term performance (risk/return) net of those extra fees will exceed the equivalent cheaper funds alternative. 

 THAT IS OUR PROMISE !     So ensure the risk/return trade off you are presently exposed to is the most efficient and

more importantly appropriate for your personal situation.  

To illustrate this consider the graph shown above. This is what academics call the “efficient frontier”. If you look at portfolio “A” and “B” they both offer the same level of risk (as measured on the X axis) however portfolio A has a higher return. Hence portfolio “B” is what we would consider to be an “inefficient” portfolio. Portfolio “C” is also inferior to “A” as to achieve the same level of return as portfolio A it exposes the investor to a greater level of risk.

Our role is to ensure you stay closer or beyond the curve illustrated in Figure 1. So ask yourself “where am I currently sitting?”    -  the answer is only a phone call away. Remember “TIME IS MONEY” -  you worked hard to build your savings. Make sure your savings are working hard for you.

INVESTMENT PHILOSOPHY

We have all heard of the old adage “Don’t put all your eggs in the one basket”. In fact most people would agree it has become an integral part of our generally accepted set of values we adopt in our day to day living as rational people. But if we stop and think about it – what exactly is this adage suggesting?

Most people interpret the saying as putting savings/investments dollars into several different assets. As an example let’s consider an investor who may purchase and in most cases borrow money to obtain several residential investment properties. Over several years the investor may reach the point of having substantial equity in as many as five individual properties. This is often a common occurrence of where an individual investor may feel a sense of security that they have a well diversified investment portfolio or “Eggs in different baskets”.

UNFORTUNATELY THIS IS OFTEN FAR FROM THE REALITY OF THIS SITUATION

To explain why we need to briefly mention an article published in the journal of finance in 1952 by the father of modern portfolio theory Harry Markowitz. Prior to Markowitz’s findings people thought rather loosely (and as I have pointed out still do to this day) about return/risk trade off and “diversification”. Markowitz’s breakthrough was to effectively prove that simply holding a specific number of individual assets may only effect to average and individuals risk –

Not to actually reduce it. Most people would agree that holding several investment properties would be less risky that just holding one, but what about the risk that comes with the residential property market as a whole? There is no doubt that investors will experience different levels of buyer demand or price appreciation in different geographical location but most people would agree it would be quiet likely that the cyclical or market trends with the assets would tend to move fairly closely together over time.

The reason for this is because the investor in fact has all his eggs in the one asset class, and is exposed only to one market. What Markowitz showed was that the only way to reduce as opposed to simply averaging the risk of a investment portfolio was to add an asset that will move differently to the existing portfolio as a whole.

So when one part may be on an upward trend, it may well be that another part is on a downward trend or experiencing “soft” demand conditions. Ultimately this will result in a far less volatile portfolio over the long term which can be crucial particularly where an investor has borrowed to invest.

We call this concept “Correlation”. This simply means how does one asset tend to move (perform) relative to another asset over time. The lower the correlation (differing asset performance in specific time periods), the greater the overall volatility or “risk” of the portfolio is reduced. Most investors fail to give this concept its due credit or may develop a bias or favoritism (often based on historical performance) towards a particular asset class. 

That’s human nature! Unfortunately human nature is not always a rational force particularly where an investment decision may involve losing that much loved feeling of control. We appreciate this and is the foundation of the approach we adopt with our clients - your participation! We encourage you to be involved (on whatever level you desire) to create a team effort! With a close working relationship with our clients we can offer a service tailor made for you.