Our Investment Advice and Philosophy

We are independent from fund managers, banks and fund providers. We can therefore customise our investment solutions for each client without conflict of interests that can occur with commission based advisers.

We use three key steps in our independent Investment advisory process. These are:

• Assessing a client's desired return and risk perception.
  
• Constructing a portfolio with a forward looking asset allocation method.
  
• Selecting investment funds for each asset class.

Assessing a client's desired return and risk perception

It is important to assess the investor's tolerance to fluctuations in investment returns and the risk of capital loss. There are various methods available, but few use detailed psychometric testing.

We use a comprehensive financial risk tolerance test from FinaMetrica. This gives reliable in-depth insight into a clients' financial attitudes, values, motivations, preferences and experiences. It uses a scientifically validated approach and helps to remove investment adviser bias.

Constructing a portfolio with a forward looking asset allocation method

A diversified investment portfolio consists of defensive and risky assets that can be classified into cash, fixed interest, shares, property and alternative assets (hedged funds, futures).

A fundamental justification for asset allocation is the notion that different asset classes offer returns that are not perfectly correlated, hence diversification reduces the overall risk in terms of the variability of returns for a given level of expected return.

The original research by Brinson, Hood, and Beebower, 1986 on asset allocation studies with US pension funds has been disputed.  Later studies such as those reported by Meir Statman 2000 et al reinforce a general belief that asset allocation explains more than 90% of the volatility of returns of an overall investment portfolio.

Traditionally investment asset allocations for a diversified investment portfolio have been based on historical returns for each asset class. As there is no guarantee that past relationships will continue in the future, this is one of the "weak links" in traditional asset allocation strategies as derived from "Modern Portfolio Theory". It is not forward looking, which is the basis for Tactical Asset allocations.

Over the last fifteen years of investment experience we have concluded that the traditional asset allocation model based on "Modern Portfolio Theory" (H.Markowitz) has not been very effective in the market extremes that investors have experienced over this period. Perhaps the most spectacular example of Modern Portfolio Theory's shortcomings was the $4.5 billion (USD) failure of Long Term Capital Management in 1998.

We have chosen to adopt a different approach to asset allocation modelling which is based on a methodology referred to as "robust portfolio modelling". Our recommendations are provided by Farrelly’s, a specialist asset allocation provider. The methodology was described by John Bogle in 1991 as the Occam’s Razor approach to forecasting. This breaks down forecasting market returns into three key elements. These are income, growth in income, and the effect of changing valuation ratios (P/E ratios).

For accuracy, Farrelly's asset allocation modelling uses these three key elements to derive ten year investment forecasts for each asset class. The main reasons for this are that earnings per share growth are steadier over ten year intervals than they are for one year periods, and the effect of a change in Price Earning ratios is much smaller over ten years, than one year.

The asset allocations that we use can be quite different to those derived from the historical returns model, however the overall allocations to growth investments and income investments for each client risk profile are similar to the more traditional approach.

Using the forward-looking return asset allocation modelling and and the underlying risk assumptions, and robust portfolio optimisation techniques results in a more stable model which is likely to produce solid returns across a broad range of economic scenarios - that is the fluctuations investors have experienced over the last decade.

Selecting investment funds for each asset class

With over 18,000 managed fund options available in Australasia alone, how could you possibly know which funds will give consistently good overall returns?

We use research from Morningstar to filter down the available funds which gives us a preferred list of between 45-60 funds. We then cross check this with reports from other research house recommendations. With direct shares its also best to get a consensus by combining several share broker recommendations. We find there can be quite a variation of recommendations between different share broker firms.

Drivers of forecasting investment returns

1. Income
2. Growth in Income
3. Effect of changing valuation ratios

Psychological Risk Tolerance

is the attitude of an individual that describes how receptive they are to ideas involving risk, and their ability to cope emotionally with the stress that can be caused by volatility and uncertainty during the investment journey.

Financial Risk Capacity

is the ability of an individual to cope financially with poor long term financial outcomes - that is, the investment destination.