Objectives of our portfolios

Investment portfolio

An investment portfolio is the assets held by an investor. 

Broadly speaking asset classes are broken into growth and defensive categories.  Below is a list of the asset classes split into the broader growth and defensive categories we generally consider in our portfolios. 

Growth assets

• Listed Australian equities (shares)
• Listed international equities
• Property (inclusive of direct property)
• Infrastructure (toll roads, airports, etc)
• Commodities (agriculture, precious metals , energy etc)
• Alternative assets (private equity, single or multiple trading strategies -see “Investment styles” for more information)

Defensive assets

• Government bonds (Australian and international issued)
• Corporate bonds (Australian and international issued)
• Cash and term deposits
• Hybrid bonds
• Mortgage backed securities

When determining whether an investment asset is defensive we consider them on a case by case basis.  The predominant factor is the likelihood that the original capital invested is returned at the end of the investment period.  For example even though a Greek bond is a government bond we would never consider a non investment grade bond as a defensive asset.

Objectives of our portfolios

The aim of our investment portfolios is to meet our clients’ needs and objectives.  As we appreciate that no two investors are the same, when recommending a client an investment portfolio we consider:

• the client’s need for capital preservation over the short, medium and long term i.e. the client’s risk tolerance;
• the client’s bias towards a specific asset class e.g. direct property, Australian shares;
• the projected pre- tax return of the portfolio;
• the client’s tax situation with the view of maximising after-tax investment returns;
• the client’s need for capital draw downs; and
• the client’s need for income.

How we select our investments

We take great care constructing our client portfolios.  We construct our client portfolios in a three step process. 

1. Determine for the client an appropriate spilt of growth and defensive assets after assessing their need for capital preservation, risk tolerance and capital draw downs – also known as the client’s risk profile.
2. Consider the client’s income requirement and tax situation then select the most appropriate asset class allocation and investment style within those asset classes.
3. Select investments using a ‘best of breed’ professional money/fund manager approach.

The risk profile concept

Our risk profiles and splits between growth and defensive assets are as follows:

• Conservative (20% Growth/80% Defensive).
• Moderately conservative (40% Growth/60% Defensive).
• Balanced (60% Growth/40% Defensive).
• Growth (80% Growth/20% Defensive).
• High Growth (100% Growth/0% Defensive).

Investing versus speculating

There is a clear distinction between these two terms.  To invest is to put money into an asset with the clear purpose of making a profit; when investing, there is an expectation that the investment will provide income or profit within an expected period of time.

When speculating, assets are bought in the hope that there will be an unexpected rise in the price or the asset will provide unexpected income.  To speculate is to take part in a high risk venture.  Speculating is essentially a form of gambling; taking the chance that the ‘investor’ will be lucky, that they will make a profit, but there is no certainty and considerable risk.

Most people have a perception of what these words mean and therein lies the problem.  For example, if an ‘investor’ purchased a share and sold it a month later for a profit, it could be assumed that they had invested in a business.  This was not the case as they merely speculated.  The definition of invest has an implied timeframe associated with it.  

Our views on ‘speculative’ funds

At Humphrey Partners, we do not create speculative portfolios but create investment portfolios with specific tailored objectives.  This can consist of managed fund recommendations that use ‘speculative’ investment strategies.  However, we believe after considering the manager’s expertise, investment strategy and diversification benefits of the overall portfolio, our recommendations are not speculative.

Why we use professional money managers

We recommend professional money managers as we do not believe we can select underlying investments (e.g. individual stocks) better than those investment managers we hold in high regard.  For this reason we rarely recommend specific securities.

How we select our professional money managers

We assess the following attributes of fund managers:

• style and approach – See “Investment style” for more information;
• financial stability;
• likelihood of retaining key persons;
• attitude to risk management;
• past performance (this may be with their previous fund if they have recently changed funds);
• attitude to tax planning;
• true to label; and
• fee structure.

We obtain this information by various sources, including:

• taking directly to the fund manager;
• talking to their competitors;
• talking to hedge fund brokers and industry peers;
• external asset consultants including Standard and Poor’s and Zenith Partners; and
• Radius Wealth’s investment committee.

Please note, investment products not included on Radius Wealth's approved products list may only be recommended where it is considered suitable for a client and has the specific endorsement by the investment committee on a case by case basis.

Investment styles

Investment style refers to the different style characteristics within a given investment/trading philosophy.

Examples include:

• Large, medium and small capitalisation
• Value, growth and GARP investing
• Passive and active management
• Long and short
• Pair and convergence trading
• Fundamental investing
• Technical trading
• Arbitrage
• Black box trading
• Top down and bottom up approach
• Qualitative and quantitative
• Absolute return funds
• Special situations

For more information of the above investment styles please refer to our investment glossary.

Diversification and portfolio construction

Diversification is the investors ‘free’ lunch as it consistently reduces a portion of the portfolio’s risk.  Our portfolio construction is structured to maximise investment returns while reducing overall investment risk.

We don’t diversify for the sake of it; our recommendations are to add value for the client and therefore we do not overcrowd fund managers.

Direct property

Direct property and shares have many characteristics and ultimately provide different advantages and disadvantages to each investor.  We assess our clients on a case by case basis and endeavour to derive the best mix of direct property and shares to suit them.

We do not recommend specific properties, however if requested we may recommend a buyer’s agent.

Tax and investing

When appropriate for our clients we always prefer investment managers that consider after tax investment returns.

After tax investments returns are usually enhanced with low investment turnover and the ability to sell stocks before year-end to crystallise capital gains or losses.

Low investment turnover results in:

• a higher portion of tax credits attached to dividends (due to the 45 day rule); and
• higher unrealised capital gains, which reduces taxable income and hence tax (capital gains tax can be discounted by up to 50% if investments are held for more than 12 months).

Risk adjusted returns

Risk adjusted returns is a concept that refines an investment's return by measuring how much risk is involved in producing that return.  When comparing two or more potential investments, an investor should always compare the same risk measures.  This will ensure that each different investment can be compared in order to get a relative performance perspective.  

We also use risk adjusted returns as a method to avoid unwanted risk.  We do this by assessing a client’s target investment return and recommending investments with the lowest level of risk which is required to achieve that return.

Liquidity

We generally only recommend ‘liquid’ investments with direct property being the main exception.  We believe illiquid investments are best accessed via an exchange traded investment vehicle to avoid them becoming frozen.

International investing

Investing internationally can provide access to industries, companies and bonds not available in Australia.  As Australia represents less than three per cent of the total world share market we can achieve diversification benefits by adding international exposure to a client’s portfolio.

Foreign exchange risk

When investing internationally we carefully consider the foreign exchange (FX) risk to a client’s portfolio.  Foreign exchange risk in international funds can either be hedged, unhedged or managed.

Depending on the strength of the Australian dollar relative to the currency exposure of the investment together with the objectives of a client’s portfolio determines how we manage a client’s FX risk.

Portfolio performance

We endeavour to track our clients’ portfolio performance against the most appropriate benchmark.  For example if a client had an investment portfolio consisting of Australia shares we would benchmark the portfolio’s performance against the ASX200 accumulation index.