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By July 31, 2014April 28th, 2020No Comments

Nine times out of ten, an investor walking into an Adviser’s office seeking value and market outperformance will be pointed in the direction of an actively managed fund. The fund manager receives a fee to make good decisions based on their knowledge and market experience.

Simple enough? Not necessarily.

Looking back at the Global Financial Crisis (GFC), it was irrelevant whether you were invested in actively managed funds or a passive index tracking fund, you lost capital because of your exposure to the market.

It didn’t matter if you held ANZ over CBA or RIO over BHP, they all form part of the same asset class which fell in value.

In a recent press article, AMP Capitals Chief Investment Officer Sean Henaghan is quoted by saying:


“The problem with a lot of the current system though is that if you’re a balanced fund, the PDS defines your exposure to growth assets and it’s got to be 60 and 80 per cent, so you’re constrained by this supposed risk management”

Growth assets are comprised of Australian and international equities and property, whilst defensive assets usually contain lower volatility income producing investments including fixed income securities and cash.

In my example we will invest $100,000 into an actively managed balanced fund: $80,000 of growth exposure and $20,000 of defensive exposure.

Let’s say the growth assets increase by 10% which results in the exposure increasing from $80,000 to $88,000. According to the mandate, we are now over exposed to growth assets and the manager is required to sell down until the fund reflects the 80/20 split.

A fund manager is unable to act upon opportunities in a volatile market, rather he is constrained by them.

In the event of a market downfall, again the fund manager will continue to buy growth assets and sell defensive assets.

The lesson to be learnt from the GFC and the recovery is that asset allocation should be the primary focus of your investment portfolio, not stock selection.

An interesting quote from Jeremy Graham has been on my desk for some time now, when asked what investors would learn from the financial crisis:

“In the short term a lot, in the medium term a little, in the long term, nothing at all. That would be historical precedent.”

It would be great to hear about some of things you have learned from the GFC and how it has changed your attitude to investment risk.

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