Strengthen Your Core | BetaShares

Strengthen your core

Learn how different exposures may be suited to form the core of a portfolio over the long run.

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The core of a portfolio is, by definition, the foundation of any investor’s portfolio.

BetaShares believes core exposures should encompass the following characteristics:

    • Meet the objectives of each asset class as determined by the Strategic Asset Allocation process
    • Be able to be held for the long-run to reduce turnover and transaction costs
    • Be robust through all market cycles
    • As the largest holding in the portfolio, should demonstrate compelling “Value”, usually demonstrated by strong, long-run, net-of-fee performance
    • Contribute to the overall stability of the portfolio from a volatility and drawdown perspective

Selecting the core of the portfolio that best matches the asset allocation objectives is likely to result in a more efficient portfolio with desirable risk and return outcomes.

1. Global Equities

Asset Class Categorisation: Growth
Asset Class: Global Equities
Indicative % of Growth Investor Portfolio (70/30): 30-35%
ETF / Active ETF: QLTY, HQLT

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Case vs Active in this asset class
‘Quality’ is recognised as an investment factor screened for by many active managers in their selection processes. QLTY delivers this factor in a cost-effective and transparent way.

Case vs Passive in this asset class

Quality companies have historically tended to display greater return and lower drawdowns over the long-run compared to passive market-cap weighted indices.

 

Key points:

    • Holding a portfolio of high-quality global companies in our view makes an excellent long-term core allocation in a portfolio, due to its compelling historical long-run performance, risk-return characteristics and resilience during market downturns compared to active and passive peers
    • Quality equity exposure is available via a systematic, rules-based screening approach at an attractive price point, reducing pressure on overall portfolio fee budgets and resulting in more of the returns compounding in the investor’s pocket over the long-run

2. Emerging Markets

Asset Class Categorisation: Growth
Asset Class: Global Equities
Indicative % of Growth Investor Portfolio (70/30): 5-10%
ETF / Active ETF: ASIA

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Case vs Active in this asset class
Many active EM managers have an overweight to the Asian technology & consumer thematic. ASIA delivers this longer term growth thematic in a cost-effective and transparent way.

Case vs Passive in this asset class

The composition of Emerging Markets has changed materially over recent years from “resources centric” to “technology and consumer centric”. ASIA encapsulates “New EM” cost-effectively and without the “Old World EM” drag. It has significantly outperformed popular EM indices over both shorter and longer time frames to 31 July 2020.

 

Key points:

  • 1

    Long-term secular growth trends have likely driven a permanent change in Emerging Markets (EM), requiring meaningful EM allocations for investors seeking true exposure to the global economy

  • 2

    3 of the 10 largest companies in the world are now Emerging Market businesses (Alibaba, Tencent & Taiwan Semiconductor)

  • 3

    The composition of Emerging Markets has shifted dramatically over recent years from an exposure based heavily on Resources to one based around Information Technology and Consumer Discretionary, with resources companies like Petrobas, Gazprom and Vale being overtaken by Alibaba, Tencent and Taiwan Semiconductor

  • 4

    The core drivers of EM returns can be accessed in a cost-effective and targeted manner via transparent ETF exposure, easing pressure on fee budgets and resulting in more of the returns compounding in the investor’s pocket over the long-run

3. Fixed Income

Asset Class Categorisation: Defensive
Asset Class: Fixed Income
Indicative % of Growth Investor Portfolio (70/30): 15-20%
ETF / Active ETF: BNDS (Core Broad), AGVT + CRED + QPON (Core Tailored: Building block blend)

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Case vs Active in this asset class

Core Broad
Managed by the only active manager to have both outperformed the benchmark, net of fee, over the last 5 yrs to 31 July 2020 according to Morningstar Direct data and remained in the top quartile vs active funds for each of the 5 yrs to 31 December 2019 according to the SPIVA Report.

Core Tailored: Building block blend
Building block approach – Allows advisers to tailor a fixed income allocation to meet the needs of a portfolio more precisely, and without relying on the inconsistent return and equity diversification outcomes of many active managers.

Case vs Passive in this asset class


Core Broad
Simple, broad market active solution that has outperformed the benchmark from both a risk and return perspective, net of fees, over the last 10 yrs to 31 July 2020.

Core Tailored: Building block blend
Building Block Approach – Allows fixed income portfolios to be constructed at low cost which can either be tailored to investor needs or designed with the aim of replicating broad benchmark outcomes with superior risk and or return outcomes. Seeks to overcome the limitations of traditional bond indices, i.e. issuer weighted, unstable duration profiles, segment creep and little/no roll yield.

 

Key points:

    • Broad Fixed Income indices have changed over time in terms of both duration profile and sector composition, and are becoming increasingly inefficient
    • Low interest rates have not only pushed returns in fixed income lower, they have arguably reduced the ability of some fixed income exposures to offset equity risk in multi-asset portfolios
    • Investors need to account for these factors when considering the construction of their fixed income
      core to ensure future results from this asset class meet the generally accepted expectations of Fixed
      Income investments, being:- consistent and stable income
      – high level of capital value stability
      – diversification away from equity risk in a multi-asset portfolio

4. Australian Equities

Asset Class Categorisation: Growth
Asset Class: Australian Equities
Indicative % of Growth Investor Portfolio (70/30): 30-35%
ETF / Active ETF: A200 (Core Broad), EX20 (Core Growth), EINC (Core Income)

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Case vs Active in this asset class

Core Broad
~81% of active funds have underperformed the benchmark over the last 5 yrs to 31 Dec 2019, and none of the top quartile managers from 2015 maintained top quartile performance through to 31 Dec 2019. This highlights just how hard it is to build a portfolio core with an active approach. A200 (at 7bps mgmt. fee) offers a broad exposure which reduces pressure on fee budgets and with compelling historical performance vs. active management.

Core Growth
Cost-effective exposure to the growth, performance and diversification that an EX20 equity strategy provides. Has outperformed many popular broad-market active managers over the long-term.

Core Income
Has generated market-like performance over the long-run with a rigorous and forward looking focus on sustainable income.

Case vs Passive in this asset class


Core Broad
At 7bps p.a., A200 is the lowest cost broad-market ETF in Australia. Lower fees allow more of the return to compound over the long-run, a critical consideration for a long run core.

Core Growth
Provides a more growth-focused and diversified sector exposure than the broad-market. Has shown better historical performance since inception to 31 July 2020, diversification and lower fees compared to similar diversification strategies such as Equal Weight. Has also shown better historical performance since inception vs the broad-market.

Core Income
Forward looking and actively managed income strategy may be advantageous relative to systematic passive equivalents.

 

Key points:

  • 1

    The sector concentration of the Australian Equity market has been brought to the fore recently. Favourable economic conditions in Australia lead to 26 years without a recession, until the COVID-19 Crisis

  • 2

    This record-breaking period enabled Australian banks to deliver unprecedented runs of share price appreciation and dividend growth that may never be seen again and masked the true cyclical nature of this industry

  • 3

    Continued growth challenges for the Australian market (from its heavy cyclical weightings) shine a spotlight on the importance of diversification and fees in portfolios. Money saved on fees can compound returns left in the investor’s pocket

  • 4

    Low interest rates and on-going dividend cuts/dividend suspensions are placing income-seeking investors under extreme pressure

  • 5

    Astute selection of Australian Equity exposure may help address these issues for investors

5. Small Cap Australian Equities

Asset Class Categorisation: Growth
Asset Class: Australian Equities
Indicative % of Growth Investor Portfolio (70/30): 5-10%
ETF / Active ETF: SMLL

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Case vs Active in this asset class
We believe outperformance in the small caps sector can be achieved over the long-term by identifying and avoiding companies with undesirable investment characteristics. This can be targeted with sensible (yet extensively tested) screens, and delivered in a cost-effective way.

Case vs Passive in this asset class

Rules-based strategy screens to remove many undesirable companies that are included in the broad small cap index. Removes those that are unprofitable or excessively leveraged.

 

Key points:

    • Small Cap equities have long formed part of the asset allocation for investors looking for higher long-run growth profiles and broader exposure at the core of their portfolios
    • This segment of the market is not well represented in traditional benchmarks
    • A systematic rules-based approach has potential to deliver compelling outcomes relative to active and passive peers
    • Lowering cost via a rules-based approach can reduce pressure on fee budgets and results in a greater proportion of market returns remaining in the investor’s pocket to compound over the long-run

6. Gold Bullion and Gold Miners

Asset Class Categorisation: Defensive
Indicative % of Growth Investor Portfolio (70/30): 5-10%
ETF / Active ETF: Gold Bullion: QAU, Gold Miners: MNRS*
*MNRS is exposed to sharemarket risk.

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Case vs Passive in this asset class
Physically backed gold bullion (QAU) or gold miners (MNRS) with a currency hedge.

The historical long-term positive correlation between Gold prices and the AUD means currency hedged gold has traditionally outperformed unhedged gold in periods of rising gold prices.

 

Key points:

  • 1

    Negative real interest rates globally form a positive environment for Gold Bullion

  • 2

    Gold Bullion has historically displayed defensive characteristics and low correlation to other major asset classes, making it a potentially strong addition to a portfolio in an uncertain environment especially at a time when record low rates may reduce the diversification benefit of some bonds

  • 3

    In rising gold price environments, it has historically been preferable to hold Gold on a currency-hedged basis and this is even more the case when considering allocating to gold miners

Learn more by attending our exclusive webcast 24 September 2020 | 11:30am - 12:30pm (AEST)

CPD Accredited

Please join us for an exclusive financial adviser webcast, in which we focus on this crucial aspect of portfolio construction and examine these core exposures in more detail. This interactive webcast will be presented by Chamath De Silva, Senior Portfolio Manager and Cameron Gleeson, Senior Investment Specialist.

About BetaShares

BetaShares is a leading manager of ETFs and other Funds that are traded on the Australian Securities Exchange (‘ASX’).

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