Securities Fund Choice
Knowing what various products and strategies seek to address, in terms of diversification benefits, core (beta-index based) and satellite (alpha-skill based) exposures, the next step is to put all the pieces together and build the portfolio by choosing the best suite of products and/or securities for the client portfolio to meet their stated objectives.
This is no easy task as the way the products and/or securities are blended is critical in ensuring that the client’s objectives are aligned. This involves a detailed look at the components of each asset class so the overall framework can be constructed.
For example, the following is a typical example of how an Australian Equity portfolio with a mild growth bias may be constructed:
| Australian Shares | Core Exposure
(Beta) |
Satellite Exposure
(Alpha) |
Portfolio
Exposure (%) |
| Growth Fund or Shares | 25% | 25% | |
| Neutral Fund or Shares | 40% | 40% | |
| Value Fund or Shares | 15% | 15% | |
| Small Companies Fund | 15% | 15% | |
| Microcap Fund | 5% | 5% | |
| Total Portfolio | 80% | 20% | 100% |
The idea of blending the underlying exposures is to capture the various stages of the economic cycle. Growth funds (or shares) are typically invested in companies that do better in an expanding economic climate and tend to offer investors more capital growth rather than pay a strong dividend (resource stocks, such as BHP, RIO etc.). Value funds (or shares) on the other hand tend to invest in companies that do better in neutral and/or contracting economic conditions as they tend to consistently deliver strong dividends with limited growth (healthcare, telecoms, utilities etc.). The neutral fund (or shares) typically invests in both growth and value stocks.
Some clients prefer to have their Australian share exposure in listed securities rather than managed funds for the ease of execution and liquidity appeal. Access to such exposures is possible by investing through a registered Stockbroker, into Exchange Traded Funds (ETF’s) which are listed on the Australian Stock Exchange (ASX). The ETF’s offer similar exposure to the unlisted funds and are managed by the same underlying fund managers. Many of the ETF’s are index tracking vehicles that offer exposure to all the underlying shares in the prescribed index. As such, these vehicles can easily be utilised for a portfolio’s core exposure to the asset class.
The listed framework is suited for SMSF’s who are looking to reduce the costs of the administration platforms that support the unlisted products and mitigate the liquidity risk of being cash locked like some unlisted schemes experienced during the GFC. Most platforms also cater for the listed securities for those clients that do not require a SMSF structure.
Each asset class product and/or security exposure required is tailored to target the risk, investment and return objectives of the client. Only products that have been researched, pre-vetted and are available on a Licensed Dealer’s approved product list (APL) are available for use in the portfolio. For direct shares, research is obtained from a Stockbroker/Research Houses who is an approved referral partner (ARP).