The problem with the term ‘balanced’…

Last week I talked about investment returns not necessarily to blow our own trumpet, but more to give reassurance that diversification works and that building in some downside protection can reduce the very big swings, single asset classes can have.

In the coming weeks we are going to spend a bit of time (with your permission) to provide some education on investments and the lessons that can be learned from periods like this.  I instantly sense some fidgeting and reaching for the delete button but bear with me and I will try to make it slightly entertaining.

Please feel free to pass this on to friends, if you think it may be good for them as well, and all our previous posts are on our website so they will be able to see that we ‘walk the talk’ so to speak.  We were worried about ‘Icebergs’ for some time https://www.robinafs.com.au/about-that-iceberg-field

I want to revisit a post I wrote back on the 1st of May 2020 – seems like a long time ago – https://www.robinafs.com.au/so-enough-about-viruses-what-has-happened-to-my-investments. One of our key messages in that update was understanding what you are investing in and the risk you are taking in things like illiquid assets.

Illiquid assets are things like real property, infrastructure projects and private equity projects. These can be good assets over the longer term and many investors would have had very handsome returns in all these structures. It is the overexposure to these assets that causes the problems and I note this week we can finally see some of the results we were concerned about.

We discussed last week that our AAN Core balanced fund had achieved a return of 7.48% for the twelve months to 1 May 2020 and the AAN Growth had managed 7.99%.

  • The AAN Core fund has a growth asset to defensive asset ratio of 65% to 35%. Growth assets are things like shares (Australian and international), listed property, infrastructure etc and defensive assets are more cash, bonds, term deposits and fixed income.
  • Our AAN Growth fund has a growth to defensive asset ratio of 80% to 20%. We would class that as a lot more aggressive and we had very few clients in this as we entered the new calendar year as we had concerns about the ‘irrational exuberance’ we were seeing.

Many of you would have had conversations with your adviser in 2019 about ‘de-risking’ and as we always reiterate, this was not about predicting the future but preparing for it.

One of our clients asked me this week about a friend’s portfolio who has not been seeing the same results.  They were in the Host Plus Balanced fund which had won all sorts of industry awards.

They have just published their figures and the result for twelve months to 31 May 2020 is -3.52%.  That doesn’t sound that bad but let’s look at the opportunity cost:

  • If the client’s friend had been in the AAN Core and they started on 1 June 2019 with $500,000 they now would have had approximately $537,400. Instead, they have approximately $482,400.  A difference of $55,000 in one year.

So why such a big difference?

  1. Firstly, the Host Plus Balanced fund would appear to be ‘balanced’ only in name. They have convinced consultants through some ‘re-categorising’ of growth assets to defensive assets that they were a 75/25 fund. In actual fact, more diligent analysts have dug a lot deeper and would argue they are in fact a 92/8 fund.  A very aggressive option, arguably suitable for a 25-30 year old with 30-35 years to retirement but not quite the label on the box.
    1. https://www.afr.com/companies/financial-services/the-coronavirus-gives-hostplus-cio-sam-sicilia-a-lesson-in-risk-20200413-p54jgn
  2. The fund has a large exposure to illiquid assets. As we mentioned back in May, these can mask some volatility as you don’t have to revalue regularly. However, the governments superannuation early release program, meant that all the underlying investments had to be valued accurately.
    1. You have to do this as otherwise the exiting members are cashing out at a higher price than the underlying assets are worth.  It is a double whammy for the remaining members as they suffer the loss on their assets in a reprice and wear the losses of the members that have already gone.
    2. https://www.aufinancenews.com/2020/04/03/hostplus-rest-slash-valuations-of-unlisted-assets/
  3. Lastly, Host Plus and a number of the big industry fund managers (Australian Super as another good example) have sacked the portfolio managers that built the longer term returns they advertise, and taken the investment management back ‘in-house’. Brand names that we use like Fidelity, Perpetual, Bennelong and Magellan, all played a part in their historic investment performance numbers but have had their mandates withdrawn.  Unfortunately, the result is a revolving door of portfolio managers and we have even seen Chief Investment Officers quitting over trustee and board pressure to use a ‘related’ investment solutions that those board members may have an interest in.
    1. https://www.afr.com/chanticleer/aussuper-dumps-three-equities-managers-20190510-p51lyn
    2. https://www.smh.com.au/business/companies/you-have-to-drop-this-former-exec-accuses-super-fund-of-conflicts-20180711-p4zqw6.html

So are there lessons we can take away from this?

  • First and foremost, we believe that a generic bucket of investments with a one size fits all approach does not provide a good result for our clients. Each client has their own attitude to risk and different domestic complexities that require a strategy that is built for their family group.
  • The ability to hold assets in your name – not a pool of assets – offers far more flexibility and transparency.
  • Risk free returns through appropriate tax structuring and individual tax positions can add substantially to a client’s total return.
  • Investment managers have to be held to account and regularly reviewed. No one manager is good at all asset classes and actively sourcing best of breed solutions adds that incremental performance that separates good from great.
  • Don’t chase returns in the short term and don’t overreact to negative news. Caution is always appropriate but should be part of the discipline continually – not just when we see market setbacks.
  • Lastly, you can’t predict the future but you can plan for it.
  • 16/06/2020