Core strength: working the abs of your investment portfolio
National Head of Practice Development helping advisers to enhance client value and develop their businesses. Over 26 years’ experience working with financial planning practices, with qualifications including a Diploma of Financial Planning and a Grad Dip in Applied Tax and Financial Planning.
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A well-diversified portfolio can assist with reducing volatility and enhancing performance returns.
And perhaps the easiest way to diversify your portfolio is to invest in what are known as ‘core’ exposures. The concept of core exposures is often used in the financial advice world and refers to the foundations of, or larger allocations within, an investor’s portfolio. Core exposures can be across multiple classes, and typically avoid taking large sector or security-specific bets. If you want to add stock or security-specific risks to your portfolio, conventional wisdom would suggest that this should be undertaken by allocating smaller amounts known as ‘satellite’ exposures to your portfolio.
Unfortunately, even in today’s environment, many investors do not establish an appropriate core for their portfolio, and consequently may lack adequate diversification – why is this the case?
Firstly, investors sometimes lose sight of the fact that diversification can increase returns as well as reduce volatility.
Secondly, the question of market timing can be a distraction, as many investors naturally believe there must be some way to determine which class will perform best in any given year.
Finally, investors typically tend to use their domestic market as a frame of reference for evaluating investment returns. This is problematic when the relevant domestic market outperforms other markets, as investors may see diversification as having impaired their portfolio returns.
What makes for a strong core?
It’s generally regarded as wise to construct a portfolio core that encompasses a range of asset classes.
A good core exposure is low cost and low turnover, ensuring that over time fees and tax consequences do not eat away at returns.
The starting point or amount allocated to each class may initially be determined by one of several methods, which can then be adjusted for other factors that are largely driven by your investor profile – broadly speaking, whether you are an accumulator, pre-retiree or retiree.
These methods include:
- Industry-accepted allocations determined by risk profiling tools. Most financial planners will conduct risk profiling to determine a client’s risk tolerance. The results of this place investors into a risk category from conservative through to high growth, which will guide allocations.
- Global market weight theory – this approach simply allocates capital to markets based on their share of global capital, and then adjusts it for the individual’s personal profile and other factors. This would mean that an Australian investor would have approximately 3% invested in Australian shares, as the Australian equity market is approximately 3% of global markets. This approach is less common.
- Bucket strategy – this is more commonly used by retirees, and focuses on the timeline of capital drawdowns. For example, three years’ worth of drawings might be allocated to cash, meaning that there is a three-year period until the next most conservative assets may need to be drawn upon.
Some other factors that may need to be considered when building a core portfolio are:
- Investment time horizon – those with a shorter timeframe for investing may want to have more fixed income and cash in their portfolios, as this typically will reduce portfolio volatility.
- Requirement for liquidity – illiquid investments or those with a longer timeframe should be avoided if there is a known need for liquidity in the shorter term.
- Portfolio cash withdrawal rate – eventually a portfolio may be relied upon to meet an individual’s cash needs. The timing and magnitude of these withdrawals should be planned for as part of determining the asset allocation mix.
- Inflationary risks – inflationary expectations may dictate that a certain level of return is required to match or outpace inflation. This will be partially determined by an investor’s desired retirement income.
- Emotional factors – most investors will have pre-existing preferences that will give them a higher degree of comfort when investing. These should be factored into the decision-making process.
Betashares ETFs that may be considered for a core portfolio
With the broadest offering in Australia, BetaShares is well-positioned to help you build a strong core portfolio to anchor your investments over the long term. The following table provides general information on how some of these offerings may be used.
Please note this is general information only and does not take into account any investor’s objectives, financial situation or needs. We recommend all investors consider the appropriateness of the information, taking into account such factors, and seek financial advice before making any investment decision or adopting any investment strategy.
|Typical needs||Growth profile, long timeframe, low income requirements||Medium timeframe, moderate growth profile||Short timeframe, income requirements, sensitive to market downturns|
|Australian Shares||Australian Ex-20 Portfolio Diversifier (EX20) – a portfolio of the 180 largest companies on the Australian sharemarket outside the top 20.||Australia 200 (A200) – exposure to the 200 largest companies on the ASX at a management fee of just 0.07% p.a.*||Managed Risk Australian Share Fund (managed fund) (AUST) – broad Australian share portfolio that actively seeks to reduce volatility and provide smoother investment returns.|
|Global Shares||Global Quality Leaders (QLTY) – a diversified portfolio of 150 of the world’s highest quality companies, in a single ASX trade.||Managed Risk Global Share Fund (managed fund) (WRLD) – a diversified portfolio of global shares that actively seeks to reduce volatility and protect against losses in market downturns.|
|Emerging Markets||Asia Technology Tigers (ASIA) – the 50 largest technology and online retail stocks in Asia (ex-Japan), including Alibaba, Tencent, Baidu and more.||Betashares Martin Currie Emerging Markets Fund (managed fund) – an actively managed portfolio of carefully selected companies in the world’s fastest-growing economies.|
|Fixed Income||Australian Investment Grade Corporate Bond (CRED) – Opportunity to earn attractive regular income from a portfolio of investment grade Australian corporate bonds, and potential diversification and defensive benefits.||Betashares Martin Currie Australian Bond Fund (managed fund) (BNDS) – opportunity to earn regular, attractive income from an actively managed, diversified portfolio of high-quality Australian fixed income securities.||Active Australian Hybrids Fund- (managed fund) HBRD – opportunity to earn attractive, tax-efficient monthly income from a diversified portfolio of hybrid securities, actively managed with the aim of reducing volatility.|
|Cash||Australian High Interest Cash (AAA) – provides a monthly income from cash at a competitive interest rate.|
*Other fees and costs, such as transactional costs, may apply. Refer to the PDS for more information.
Investing involves risk. The value of an investment and income distributions can go down as well as up. Before making an investment decision you should consider the relevant Product Disclosure Statement, available at www.betashares.com.au, and your particular circumstances, including your tolerance for risk, and obtain financial advice.
National Head of Practice Development helping advisers to enhance client value and develop their businesses. Over 26 years’ experience working with financial planning practices, with qualifications including a Diploma of Financial Planning and a Grad Dip in Applied Tax and Financial Planning.Read more from Damon.