Times change, so must portfolios

By Nerida Cole, Dixon Advisory

After five years of extremely difficult and volatile market conditions, even the most bullish investor will be looking at what actions to take to improve results in the next year and beyond.

Making sure the fundamentals are correct is a minimum, but some of the most common approaches to managing a portfolio are not enough to protect or grow a portfolio in a highly volatile market. Taking a much more strategic, global approach to setting the asset allocation of your investments is required.

The first fundamental step is to review, or put in place, a financial plan. Even investors who are focused on getting the most out of their portfolio need a plan to help them make sure they are not losing more of their income to tax than necessary, that cashflow is boosted by available government benefits and concessions, and that appropriate risk-management strategies are put in place.

Investors worried that a financial plan will be simply a compliance document used to substantiate the sale of a product, should visit a reputable financial adviser with a strong understanding of the Australian tax and superannuation system. This type of structuring and strategic advice is where the value will be added. By focusing on the appropriate structuring of assets, debt and cash flow, flexibility and risk can be managed.

Superannuation tax benefits

Ensuring the most effective structures are in place to optimise all available financial and taxation concessions is imperative - especially in such difficult market conditions. With tax rates as low as zero in superannuation pension accounts, investors are able to boost their returns without taking on additional investment risk.

In particular, share investors who hold their assets inside a superannuation pension account can boost their returns with the full refund of the franking credit back into that account. This concept has had greater focus because self-managed superannuation funds have been allowed an extension on receiving share transfers via off-market transfers beyond the proposed July 1, 2012 cut-off.

Asset allocation

Once the foundations of your finances are firmly in place, the next step to improving the outcomes from your investment portfolio is to review your approach to asset allocation. Advice and discussion should consider factors such as tolerance to risk, investment horizon and liquidity needs.

A set-and-forget diversified asset allocation approach is unlikely to provide the best outcome in protecting capital. However, timing the market is extremely difficult to get right and often results in investors reacting to falls and selling at the bottom of the market, and buying after the peak. Investors need to take a big-picture view of global and local economic and investment market conditions when determining where to direct, or hold, portions of their portfolio.

A common approach used by investment advisers is to diversify a portfolio across all assets and market sectors. In contrast, an investor who takes a top-down view of market conditions will avoid asset classes that are expected to underperform.

For example, the international shares component of most managed-fund style of superannuation funds has generally included a significant exposure to equity markets in countries and regions such as the US, the UK and broader Europe despite their outlook for long periods of economic and financial difficulties. Taking an asset allocation approach to avoid investing in these sectors could add the greatest value to your portfolio by avoiding an extended period of further deterioration.

Further, many Australian investors have a bias towards investing large portions of their portfolios in Australian equities. Considering the value that franking credits add to these investments, particularly for self-funded retirees and members of self-managed super funds, there have been many good reasons to take this position. However, as we have seen in the past few years, broadly, the fixed-income sector has provided better returns than equities.

Although generally it will not be appropriate or practical to reduce all exposure to Australian equities, rebalancing or directing additional savings and income towards another asset class, including fixed-income or growth assets outside Australia, should be part of the portfolio review.

Rather than maintaining an asset allocation that was appropriate two to three years ago, look at other opportunities. Overseas emerging markets such as Brazil, Russia, India and China, and global resource equities, may provide growth in the long term.

Beware the scams

In poor market conditions, investment scammers and quick-fix schemes become abundant and take advantage of frantic investors keen to regain investment losses. Many seem very appealing but are most often too good to be true. Trying to claw back substantial losses in a short time exposes investors to extremely high risk.

Investors should adopt a flexible, disciplined approach with carefully researched decisions and avoid the lure of quick decisions with overreaching promises. They should establish and maintain a solid investment structure to maximise returns through a fluid approach, accounting for economic conditions and changes to markets, and refer to their financial plan and asset allocation for guidance. This approach will improve their chances of benefiting in a recovery.

For investors who are unsure where to begin or are sceptical about re-entering the markets, reputable and qualified investment and financial advisers will add value above their fees by developing and providing quality strategic advice and well-backed asset allocation guidance.

Exercising discipline and following through with the foundations set in place while keeping on top of investment markets, will give you the best opportunity to improve investment outcomes.

About the author

Nerida Cole is Head of Financial Advisory at Dixon Advisory, a leading wealth-management advisory firm.

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