Asset Allocation

Funny I was seeing similar images after too many rums last night.

 

If you intend on working until Super is available it should be a no-brainer to put high yield in super and high growth outside for tax reasons.

The allocation (AUS vs international vs cash) question is difficult. I can't remember seeing anyone determine their allocation using a quantitative model, which logically is the correct way. Ignoring cash, which we can treat as a volatility dampener, we can simplify the problem as AUS vs international. At one end we have AUS at around it's global weighting of around 2%. The opposite end of the spectrum is AUS 100%. Over the whole history of the market AUS has a better return and using that logic 100% AUS could be validated. Conversely the size of the AUS market is so small and over weighted to financial that diversity is low and risk is high. I chose 50/50 for this very reason: I could not make a choice. My other difficulty is that I am trying to build a passive income stream from dividends to enable FIRE.

In summary 2% ASX is a valid risk minimising position. You can ratchet up ASX from there to match your income requirements / risk tolerance. Use super as a tax haven if that suits your goals.

PS I've purposely ignored Asia / emerging markets, market capitalisation and REITs / infrastructure because the same logic can be used. Start at the efficient frontier portfolio and then ratchet up based on your convictions / risk tolerance. Small caps have outperformed for periods but it would be too risky to go 100% IJR.

PPS You'll probably never be entirely happy with your allocation, particularly in hindsight when you think, for example, I knew I should have gone more into Asia.

 

I do that with LICs, but not yet with ETFs. I did consider A200 over VAS but only because of fees.

 

I've been thinking about the role of 'private equity' - ie the type of allocation you'll typically see in a super fund - and wondering if my asset allocation is predominately all listed index or quasi index Australian and international equity - what am I missing out on?

 

This article I came across on my weekend my prompt some thought...

 

I dont try to replicate what large industry funds can do with regards to alternative assets - you can't do it cost effectively / to the same standard. Instead, I use industry super fund for this type of exposure (as well as active strategies - for the same reason and tax considerations).

 

Thanks @The Falcon. Use of active strategies as an alternative makes some some sense to me.

As far as I understand it the most common explaination for inclusion of private equity as an example of an 'alternative' asset class is to enhanced diversification and returns. I'm less interested in the diversification aspect but curious about the claim of enhanced returns. Does anyone know of any data sources to substantiate this?

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Problem is regardless of the virtues of Private Equity the reality is retail investors are rarely likely to get the opportunity to invest in any worthwhile funds.

 

Aww, I've heard that something of that nature is listed or is shortly to to be. Cannot quite recall but I seem to remember it's a firm starting with a "P". Penguin maybe?

 

BAF.AX is still trading.......garbage outfit though.

 

There is heaps of stuff on PE / Alts return. You'll need to google. There is different types of PE funds based on what they are doing - typically VC (early stage) or buyout funds (using leverage to buy and build or roll up existing businesses). Historically returns have had low correlation with public markets and higher returns - there is an illiquidity premium due to funds lock up of typically 5-7 years, similar to unlisted property and also a higher risk premium.

The issue is there is now more money than deals, which has been lowering returns on average. It also seems to be that in this space, the best opportunities go to a handful of managers who generally outperform, on an ongoing basis. Punters have no access - major insto's do....and they get cheap.

 

Pengana Private Equity Trust (ASX: PE1)*

 

I'm naturally very skeptical of anything like this. With so much cheap money still sloshing around the system this just seems like another product that the financial services industry dreams up to attract(trap?) retail investors using fancy words. The equivalent of creating product "variations" to grab additional shelf space in the supermarket industry. I can picture the financial industry 'experts' all at drinks after work laughing about how much money they've managed to pull in from the retail mug punter. I really try not to be too cynical but the evidence appears strong.

I'll keep researching but my spider sense is that as a retail investor with a couple of brain cells to rub together I'm still better off going it alone and looking in the dark corners of the investable universe easily accessible to me - asx small companies, direct property investments, particular market themes for global listed companies (emerging markets, technology/disruptive markets, small companies, etc being some examples from the recent past). Of course, I suppose I don't really need any of this can just continue on with my baseline strategy of accumulating broad based index or quasi index investments with solid, long term earnings growth prospects.....

 

@Nodrog, you would be happy with the fees

Q. What are the fees associated with an investment in the Trust?

The Trust will be subject to more than one level of fees:

1. The responsible entity fee, the management fee, the performance fee, and the fees for managing the secondaries portfolio at the Trust level, and
2. The management and incentive fees paid at the underlying fund level to either GCM or other underlying investment managers.
3. The Trust pays Pengana Investment Management Limited a responsible entity fee of 0.05% p.a. and pays Pengana Capital Limited a management fee of 1.20% p.a. A portion of the management fee will be paid to GCM.

Depending on the Trust’s performance, a performance fee of 20% above an 8% p.a. hurdle return may be payable to Pengana Capital Limited.

Further information regarding the fees for managing the secondaries portfolio and the management and incentive fees paid at the underlying fund level will be in the PDS once available.

The total value and performance of the Alignment Shares are not included when calculating the responsible entity fee, the management fee, and the performance fee payable.

 

Occasionally you post something in jest but the written word being what it is doesn't come across that way. Such as the situation in this case. No way would I touch this number and I very much doubt @Nodrog would either - unless the home brew syndrome was in operation. Now there's a thought.

From the LIC 2019 thread:

 

Didn’t even bother to look. Was merely identifying the product SK mentioned. Binned the original email as soon as I saw what it was.

Personally I would never invest directly in private equity. If you want something like that probably the best option is through one of the larger Industry Super Funds. Usually the balanced option will have some smallish exposure to that asset class.

These alternate asset classes are generally included in the portfolio as an attempt to smooth capital returns. That is, different correlation to other asset classes. Well that’s the theory that hedge funds / private equity are always pushing. As a retail investor I’d personally favour lower cost, highly liquid, easily accessible asset classes such as Global listed property / infrastructure for a potentially similar outcome.

Correlation wise most of the time boring old bonds is the safest option. But you say, what about the crap interest income? Well don’t be surprised if hedge funds in particular sometimes use bond returns as their benchmark. Embarrassing many won’t beat that very low brnchmark over the long term.

 

He he yes. As soon as I saw you mention one of Batman’s foes being the Penguin I thought well it’s been posted by The Joker (SK).

So to add to the sinister plot I posted a link to the LIT in question.

Lo and behold the trap was set:

Mawawawawawhahaha

 

Which doesn't really help those that want to manage their own asset allocation.

Has anyone seen 15+ years performance data for alternative asset classes within any of the larger industry super funds? Are there any industry super funds that allow investment in these 'asset classes' outside of a premix option?

 

you'll get higher alts exposure in "high growth" pre-mix, but you cant take only alts from what I have seen.

 

What I was politely trying to suggest is that Private Equity is best avoided by the average investor wanting to manage their own asset allocation.

I’m a fan of David Swensen one of the greatest investors globally and hugely knowledgible about Private Equity.

Here’s a quote from his excellent book Unconventional Success:



Perhaps consider looking at other asset classes more easily understood, lower cost and readily available to retail investors that fulfill some of the same objectives such as correlation etc.

Personal view only of course.