Documente Academic
Documente Profesional
Documente Cultură
February 2010
TABLE OF CONTENTS
1. The Model Portfolio Offering ........................................................................... 3
1.1. 1.2. Accessing the Model Portfolios ..................................................................................... 3 Model Portfolio Reports .................................................................................................. 4
2. 3. 4.
Objectives of the Portfolios............................................................................. 5 Determining the Risk / Return Profiles ........................................................... 5 Strategic Asset Allocation ............................................................................... 6
4.1. 4.2. 4.3. 4.4. 4.5. Zeniths Strategic Asset Allocation ............................................................................... 6 Setting the Strategic Asset Allocation .......................................................................... 7 Investment Timeframe ..................................................................................................... 8 Strategic Asset Allocation Rebalancing ........................................................................ 9 Asset Classes within the Strategic Asset Allocation ................................................... 9
5. 6. 7. 8. 9.
Tactical Asset Allocation ............................................................................... 11 Portfolio Characteristics................................................................................ 11 Fund Selection ............................................................................................... 11 Portfolio Performance Calculation ............................................................... 12 Median Managers ........................................................................................... 12
1.
1.1.
1.2.
2.
3.
Conservative
Moderate
Balanced
Growth
High Growth
The graph below displays the long-term risk and return statistics that Zenith believes may be achievable over the long-term (i.e. 10 years plus) for each of the portfolios. These numbers have been calculated based on a detailed analysis of the historical risk and return characteristics of each asset class index, as well as a consideration of fund manager excess returns relative to the asset class indices.
9%
Return (% pa)
4.
4.1.
Conservative Australian Shares International Shares Australian Listed Property International Listed Property Alternatives Total Growth Assets 5.5% 5.5% 4.0% 5.0% 20.0%
20.0% 20.0%
0.0%
4.2.
5 Year Correlation
Hedge Fund-of-Funds
Australian Shares Australian Small Companies International Shares (unhedged) International Shares (hedged) Australian Listed Property Global Listed Property Australian Fixed Interest International Fixed Interest Australian Cash Hedge Fund-of-Funds Global Resources Securities Global Infrastructure Securities Managed Futures
1.00 0.92 0.60 0.91 0.73 0.73 -0.36 0.06 -0.43 0.77 0.73 0.87 -0.01
0.92 1.00 0.51 0.92 0.65 0.75 -0.44 0.08 -0.48 0.80 0.76 0.89 -0.02
0.60 0.51 1.00 0.62 0.64 0.57 0.12 -0.09 -0.04 0.31 0.34 0.55 -0.16
0.91 0.92 0.62 1.00 0.73 0.86 -0.34 0.10 -0.38 0.76 0.72 0.91 -0.06
0.73 0.65 0.64 0.73 1.00 0.75 -0.03 0.21 -0.28 0.46 0.37 0.72 -0.18
0.73 0.75 0.57 0.86 0.75 1.00 -0.17 0.19 -0.36 0.50 0.45 0.77 -0.18
-0.36 -0.44 0.12 -0.34 -0.03 -0.17 1.00 0.43 0.39 -0.54 -0.45 -0.32 -0.07
0.06 0.08 -0.09 0.10 0.21 0.19 0.43 1.00 -0.14 -0.12 -0.06 0.16 -0.12
-0.43 -0.48 -0.04 -0.38 -0.28 -0.36 0.39 -0.14 1.00 -0.36 -0.35 -0.33 0.16
0.77 0.80 0.31 0.76 0.46 0.50 -0.54 -0.12 -0.36 1.00 0.85 0.76 0.24
0.73 0.76 0.34 0.72 0.37 0.45 -0.45 -0.06 -0.35 0.85 1.00 0.68 0.26
-0.01 -0.02 -0.16 -0.06 -0.18 -0.18 -0.07 -0.12 0.16 0.24 0.26 -0.05 1.00
Further work is then done to assess the optimal weight that a particular asset class could be used in a portfolio. Zenith uses a proprietary Diversification Model to provide some guidance in terms of the allocation between asset classes. An extract of the model is provided as an example below, which shows how adding Managed Futures to a Moderate Portfolio would impact on portfolio volatility. Despite the fact that Managed Futures have a higher stand alone Volatility than the Moderate Portfolio, the graph below shows that up to a weighting of around 40%, the addition of Managed Futures would have actually decreased the overall Volatility of the combined portfolio. This is a result of the low correlation that Managed Futures has with traditional asset classes.
Managed Futures
Australian Shares
Australian Cash
Diversification Model
Volatility Impact of Adding Managed Futures to a Moderate Portfolio 8%
7%
Annualised Volatility
6%
5%
4% 3% 2% 1% 0%
0%
5%
While the Diversification Model is extremely useful in highlighting how the addition of an asset class will impact on portfolio volatility, clearly a 40% allocation to Managed Futures would be an excessive exposure for most investors. Therefore, there is also a significant qualitative component to the Strategic Asset Allocation process, where we leverage off Zeniths extensive inhouse knowledge of the risk and return inherent in all mainstream asset classes.
4.3.
Investment Timeframe
The investment timeframe for each portfolio is determined after careful consideration of expected volatility, expected negative returns and predictability of return outcomes. Based on the historical volatility of the model portfolios, Zenith has calculated the following Risk of Negative Return statistics for each of the five model portfolio types.
Risk of Negative Return Conservative Portfolio Moderate Portfolio Balanced Portfolio Growth Portfolio High Growth Portfolio 1 in 36 Years 1 in 10 Years 1 in 6 Years 1 in 5 Years 1 in 5 Years
Another useful input in setting the Investment Timeframe is the analysis of return funnel graphs. Return funnel graphs use long-term index data and model the variability of returns over different time periods. An example of a typical Growth Portfolio is show below, with 20 years of data used in the underlying model. The graph clearly shows that the variability of returns is much higher over shorter-term periods. For example, if an investor had invested in a typical Growth Portfolio for only a 1 year period (at any time over the past 20 years), their return outcome could have been anywhere between +33% and -26%. Far better predictability of returns was achieved by investing for periods of 5 years or longer, where the difference between the maximum return and minimum return was much tighter. Zenith analyses models such as this for all risk profiles (i.e. High Growth, Growth, Balanced etc).
100%
10%
35%
40%
45%
50%
55%
80%
85%
90%
95%
15%
20%
25%
30%
60%
65%
70%
75%
Return (% pa.)
10% 0% -10% -20% -30% 1 Year 2 Years Maximum Return 3 Years 5 Years 7 Years Average Return 10 Yrs
Minimum Return
Zenith utilises the above Risk of Negative Return and Return Funnel modelling in determining its recommended investment time frames for each of the five model portfolio types that we offer. The recommended investment time frames across each of the Zenith Model Portfolios are shown in the table below:
Investment Timeframe Conservative Portfolio Moderate Portfolio Balanced Portfolio Growth Portfolio High Growth Portfolio 2 3 Years 3 4 Years 4 5 Years 5 7 Years 7+ Years
4.4.
4.5.
4.5.1.
Australian Shares Australian shares funds form a core component of the Zenith model portfolios. The primary exposure to Australian shares is achieved using funds that focus on large capitalisation stocks, which have historically provided solid capital growth and reasonable levels of dividend income. The majority of large cap funds historically used in the Zenith portfolios have been long-only, however, long/short funds will also be used from time to time. Small companies funds are also used where applicable, particularly for Balanced, Growth and High Growth portfolios, where the allocation to growth assets is higher. High quality small companies funds are an attractive addition to portfolios as they can potentially enhance long-term returns.
4.5.2.
International Shares As with Australian shares, international shares funds also form a core component of the Zenith model portfolios. Zenith has tended to use a combination of long-only and long/short funds in its international shares portfolios. Whilst international shares offer a slightly lower dividend yield than Australian shares, Zenith believes the total return available from high quality international shares funds should be comparable to Australian shares funds over the long term. For this reason, Zenith tends to have an equal allocation to Australian and international shares in its model portfolios. Zenith includes two other sub-asset classes in its overall exposure to international shares, specifically: global resources securities; and global infrastructure securities. Global resources securities essentially encompasses resources & mining stocks listed on global stock exchanges, and can provide strong diversification to a portfolio when used appropriately. Global infrastructure securities includes those listed companies that specialise in infrastructure projects. Infrastructure securities tend to offer a higher yield and lower volatility than the broader international shares sector, and therefore an exposure to infrastructure securities in model portfolios can be used to not only enhance diversification, but also to increase the overall income generation of the portfolio. In order to ensure that there are not too many funds used in portfolios, Zenith tends to mainly introduce global resources securities funds and global infrastructure securities funds in Growth and High Growth portfolios. In regards to the currency exposure of international shares funds, Zenith aims to achieve an approximate 50/50 allocation between hedged and unhedged funds. Zenith released a paper in 2009 that provided our findings that a 50/50 allocation has historically achieved lower volatility than taking on a 100% unhedged or 100% hedged exposure.
4.5.3.
Property Property exposure is achieved using listed property securities funds. Property provides strong diversification benefits and can also enhance the model portfolios income profile. Whilst Australian property securities funds have long been available, the relatively recent emergence of global listed property funds in the Australian market has provided further opportunity for diversification. Global listed property offers higher growth potential with lower yields than what is generally available from Australian listed property funds. Zenith typically allocates 50% of the property exposure of a portfolio to Australian listed property and 50% to global listed property.
4.5.4.
Fixed Interest Fixed interest is used to provide the defensive (capital preservation) exposure of the model portfolios. Zenith aims to achieve diversification across three distinct fixed interest segments, specifically: Australian government bonds; international government bonds; and credit (i.e. corporate fixed interest securities). Government bonds typically provide stability and downside protection, while an exposure to credit can be used to enhance the model portfolios income profile. Zenith tightly manages the fixed interest component of the portfolios to ensure that there is adequate diversification. It is critical to ensure that the portfolios are not overly exposed to any single factor risk.
4.5.5.
Alternatives Zenith is a strong advocate of the use of Alternatives funds in model portfolios, as we believe that high quality Alternatives funds can significantly enhance portfolio diversification, lower volatility and potentially enhance long-term returns.
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There are a wide range of Alternatives products available, including Managed Futures, Hedge Fund-of-Funds, Multi-Strategy and Global Macro. It is critical that appropriate weightings are assigned to Alternatives products in model portfolios, as over exposure can lead to a risk profile that is beyond what was intended. Zenith spends a lot of time analysing how each of the different types of Alternatives products correlates with traditional asset classes, which is a significant input into the portfolio weighting process.
5.
6.
Portfolio Characteristics
To assist our clients in determining the suitability of each portfolio, we provide estimates in regards to the income, growth, total return and volatility characteristics for each portfolio. Note that the ranges provided in the table below are to be used as a guide only and are long term estimates (five years plus). Over shorter term periods, the characteristics are expected to move outside of these ranges, sometimes significantly. Portfolio Characteristics
1
Portfolio Type Conservative Portfolio Moderate Portfolio Balanced Portfolio Growth Portfolio High Growth Portfolio
Income (% pa) 5.0 - 6.0 4.8 - 5.8 4.5 - 5.5 4.0 - 5.0 3.5 - 4.5
Growth (% pa) 0.5 - 1.5 1.7 - 2.7 3.0 - 4.0 4.5 - 5.5 6.0 - 7.0
Total Return (% pa) 5.5 - 7.5 6.5 - 8.5 7.5 - 9.5 8.5 - 10.5 9.5 - 11.5
Volatility (% pa) 3.0 - 4.0 4.5 -5.5 6.5 - 7.5 9.0 - 10.0 12.0 - 13.0
7.
Fund Selection
Fund selection for the portfolios leverages off Zeniths intensive fund due diligence process and, in general, only those funds that are rated Highly Recommended or Recommended are considered for the portfolios. On occasion, an Approved rated product may be used if there is no suitable higher rated product available on a particular administration platform.
Note: It is important to realise that the income estimate is based on the expected yield of the underlying asset classes, and has not taken into account the realised capital gains, which will be variable over time. The one exception is the Alternatives asset class which, due to Australian tax laws, has traditionally paid out the majority of its return as realised capital gain and therefore we have included the expected return from Alternatives in the income column. Realised capital gains transfer some of the return from the growth component to the income component, effectively increasing the income paid out of the fund.
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A primary consideration when selecting a fund for the portfolio is how the fund will blend with other funds in the portfolio. For example, when building the Australian shares component of the portfolio, it is important to ensure that the portfolio is not overly exposed to value or growth style funds. Highly Recommended funds will be used where possible, however, if a particular Highly Recommended fund does not offer the required exposure for the portfolio (eg. A Highly Recommended growth-style fund is available, but the portfolio requires a value-style fund), then Zenith is happy to use Recommended rated funds. All funds that carry a current Zenith rating are subject to ongoing due diligence, where they are closely monitored in regards to a range factors, including: any changes in investment personnel, changes to investment process; deterioration of investment performance; or changes at an organisational level.
8.
9.
Median Managers
As discussed in the Objectives of the Portfolio section (Section 2) of this report, Zenith aims to outperform competitor products of a similar risk/return profile over the medium to longer term. In order to determine the performance of competitor products, Zenith has created a series of median managers, drawn from the universe of diversified funds, which match the risk/return profile of each of the Zenith portfolios. The calculation of the median manager is best illustrated using an example. The median manager used for performance comparison with the Zenith Balanced Portfolio has an allocation of 60% growth assets and 40% defensive assets (60/40 Median). There are currently 42 funds in the universe used for calculating the 60/40 Median. Some of these funds will have a slightly higher risk profile than 60/40, and some will have a slightly lower risk profile than 60/40, however, the median allocation of growth and defensive assets across this universe is exactly 60% growth assets and 40% defensive assets. Performance statistics for the 60/40 Median are then drawn from the median performance statistics of this universe, and displayed for comparative purposes in the Zenith Balanced Portfolio report. The entire 42 fund universe used for the 60/40 Median is shown on the following page.
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Growth Assets
33.0% 34.0% 35.0% 35.0% 40.0% 40.0% 40.0% 40.0% 45.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 55.0% 57.5% 60.0% 60.0% 60.0% 60.0% 62.5% 66.0% 67.5% 68.8% 69.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 70.0% 60.0%
Defensive Assets
67.0% 66.0% 65.0% 65.0% 60.0% 60.0% 60.0% 60.0% 55.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 45.0% 42.5% 40.0% 40.0% 40.0% 40.0% 37.5% 34.0% 32.5% 31.3% 31.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 40.0%
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Author:
Glen Franklin, Associate Director Zenith Investment Partners Pty Ltd (03) 9642 3320 glen.franklin@zenithpartners.com.au
DISCLAIMER: This report is prepared exclusively for clients of Zenith Investment Partners (Zenith). The report contains recommendations and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each client should assess either personally or with the assistance of a licensed financial adviser whether the Zenith recommendation or advice is appropriate to their situation before making an investment decision. The information contained in the report is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Zenith accepts no liability, whether direct or indirect arising from the use of information contained in this report. No part of this report is to be construed as a solicitation to buy or sell any investment. The performance of the investment in this report is not a representation as to future performance or likely return. The material contained in this report is subject to copyright and may not be reproduced without the consent of the copyright owner. Zenith usually receives a fee for assessing the fund manager and product(s) described in this document against accepted criteria considered comprehensive and objective.
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