Thoughts on my investment Strategy

As I have been seeking the opinions of our fellow PC members regarding my equities holdings and strategy that my advisor and I have been working on, I thought a thread bringing it all together based on my investment journey so far and plan going forward would be suitable.

Ill give a bit of history in this first post and then use a second post purely about the equities strategy if you want to skip this first long history lesson.

So up until 3 years ago I was purely a residential property investor. Had no knowledge or interest in investing in anything else. At that time a friend and I had just sold a reasonably large portfolio of investment properties which we developed ourselves over the few years prior. Nothing too fancy just some townhouse / duplex sites. The original plan was to hold onto them as rentals and not a build and flip strategy. But after getting into a legal stoush with a tenant ( Long story for maybe another thread ) who tried to sue we decided to sell the properties. So here we are end of 2015 sitting on a pile of cash wondering what next. The property market at the time had supposedly peaked even though now we know it had another 18months to run. Christmas 2015 talking to a family friend, older gentleman who was retired and I ask the question what do you invest in? Property trusts he say's.

Now at that time I had never heard of property trusts. So he explains a little about them and straight away I thought I like the sound of this property trust thing. Its property without the hassle of personally dealing with Sh*tty tenants. And I could be an owner of a major shopping centre. Now who doesn't want to own a shopping centre. So next day I jump online and immerse myself in research into the world of REITS. After hours then days and now into years of reading everything and anything I could find online about property trusts, it was the unlisted property trusts that appealed and made the most sense to me. Locked in long term investments, in quality assets, attractive returns 7-8% with tax deferred components, managed by experts in that field. Why would I want listed REITS in which market panic and a rush to the door by fellow shareholders could drag the price of my shares down all while accepting a lower yield for the liquidity factor which I don't want as a long term buy and hold investor.

So I'm thinking this is it, I'm going all in in unlisted property trusts. I have found the holy grail of investing. Hassle free property investing with great returns. As January rolls around the people from my friendly bank notice a nice pile of funds sitting in my account which at this stage I had put in a term deposit till I decide the next step. They kindly offer me a free no obligation sit down with there financial experts in there fancy Sydney CBD office in order to tell me what I should do with the funds. I go sure why not. No harm in chatting. So we meet and I explain how I got to this point and that I really like this unlisted property stuff. They say yeah we like unlisted property but we don't recommend you put much in that and put it in a selection of equities which we will choose for you for a small fee of 1% + gst with a minimum of $1 mill commitment. I'm thinking I don't really like the stock market but maybe should listen the experts and allocate something to stocks. But $1mill straight out of the box I'm not sure. So we finish our meet and they say we will put together an advice plan for you and email it within the next week or 2. Have a look and see what you think.

A few weeks go by and nothing. About 1 month later I receive this advice and it basically them splitting $1mill across stocks in different classes and some managed funds. Oh yeah and it states minimum commitment is $2mill not $1mill as they said in the meeting. So I give it some thought and hit the delete button. Straight to bin. Funnily enough I never received any follow up from them. Which bank?

So its early in the new year and a catch up with the family of a friend of the wife's who's husband is a financial advisor. We have met a few times before but never really discussed finances. I bring up my experience with the bank and he tells me to come see him in his office to see what he can offer. I take up his offer and go see him. He tells me his approach and which is picking a group of quality managed funds and spreading the capital. While he also did not recommend going to heavy into unlisted property, he saw why they appealed to me and was happy for me the start heavy in unlisted property, light in equities till I got more comfortable then re balance. He came across as a straight shooter and his flat fee approach which started at $7k annually made me feel comfortable that his push into equities was not based around his fee collecting. No matter what I decided to allocate to property compared to equities did not affect how much he earned. That made we more comfortable in taking his advice. Based on that I was comfortable with what I had seen and heard and allocated $1mill which was spread out across originally something like 12 different managed funds on the BT wrap platform.

And the journey into equities investing began. 1st of March 2016.

 

Paragraphs please would make it easier to read.

 

I hope that's better. I was never that good in English at school if you cant tell.

 

Beauty thanks. But I did use it as an excuse to go and get a beer hoping it would make it easier to decipher your lawyer’s paragraph.

 

So now we are coming up to the 3 year mark of the investment journey. I understand equities a lot better though still have heaps to learn. Also much more comfortable with investing in them.

To date I have committed $2.5mill in funds over the 3 years and had DRP in each of the funds. Nothing has come out at all. Even tax on gains has been paid externally. Balance as of today. A few dollars short of $2.8mill.

Outside of these funds I have 3 individual share holdings. Telstra which for some silly reason I put $20k in about 18months ago. It was on the way down and I thought hey this is something I could buy on my own. As we can see it kept going down from where I started at $4.95. The other is Charter Halls CLW which I went in at IPO and topped up a few times. Sitting at $100k approx. now and has done pretty good. Last one was only a few months back I liked Centurias CMA which is paying a nice 7.5% yield so I put $100k in.

After reading the many wise thoughts of a few fellow PC members specifically about index funds and LIC I decided to compare this to the managed funds I hold. At this time I'm in 15 different managed funds. 1 being VAS the wholesale version. A number of them have underperformed the index since I have held. Now I know 3 years is not a long time but I looked at the performances of some and even going to 5 - 7 year chart comparisons they underperform.

In saying that and in defence of the funds the PA recommended majority over 10 or inception have at least matched if not outperformed the index they match against. To name a few of the funds with the larger holdings Magallen Global fund, Macquaries IFP, Pengana Aus Equities, Lazard Global listed infrastructure, Bennelong ex 20 and a few Perpetual funds including long-short. So I raise my concerns and thoughts about this to the advisor. His response was there are a couple which he is also not that happy with and we could pull out of or sit back a little longer and hope that after a underperforming period they could bounce back.

Now I'm a buy and hold type of investor and moving the capital out of one fund across to another will incur fees and possibly trigger CG. Maybe not with these underperformers though as we are going backwards. So I say lets sit and monitor these funds over the next 6-12 months and if no improvement we make a move. There was also some underperforming funds that I mentioned that he recommended we stick with as they are strong reputable managers with a strategy that normally outperforms even though they have struggled in recent times. Example was Penagana.

Next thing we discussed was the move towards index funds. I put my case forward on index investing based on my learnings here on PC. He totally agreed and said he is a big believer in index investing. His theory is to hold a selection of good quality fund manager funds and a selection of index funds. When there are any new or strong managed funds that appear on his radar he will recommend we go in them. When there are not we go towards index funds. He did say its getting harder to find good quality managers with strong performing funds.

Lastly we agreed to move from the current BT wrap to the new BT Panorama platform. The difference will result in reducing the fees based on current values by half.

So the strategy moving forward is continue to hold the managed funds while closely monitoring the ones significantly underperforming with the option of moving out of them. Already hold VAS currently being just under 10% of the managed funds portfolio. Add VGS, Add IVV and add IJR ( Thank you to a certain member who pointed me to those last 2 index funds ).

Over the next say 2 years the plan is to bring the index funds holdings to be 50% of the total managed funds portfolio. Being that I already hold $250k in VAS I will put an initial lump sum in VGS $50k, IVV $50k and IJR $25k. Then a monthly amount which will be split 50% into VAS and the other 50% will go between the other 3 on the exact same split as the initial lump sum.

Above that we would do lump sum investments of say $200k at every interval in a significant market down turn being of 15%, then again at 20% , 25% , 30% and so on.

Long rant over any opinions thoughts on the journey so far or the plan going forward would be welcomed. Just be gentle.

 

Whats the goal here?

 

Firstly is to create an income stream to live of once income from work ceases or is significantly reduced. We are big spenders so a good high flow stream is required. Secondly is just to build wealth in the hope one day I can pass on something that the kids could continue to build and continue to pass along.

Note: Even though I'm a big believer in investing for income flow such as dividends. I don't for see needing the income from this equities portfolio. I have set up my unlisted property trust holdings as my source of income if and when the need arrives.

 

Long posts, thanks for the information. My question (having gone through this myself) is why continue in the managed fund? Are they outperforming alternate LICs/ETFs by enough (and more) to compensate for the additional management costs (LIC and ETF mgt costs are extremely low so I would assume managed funds would have higher management fee). Yes, you talk about selling costs, but since you're buying and holding, there would be a point that you benefit from the lower management/holding costs. One very big learning for me was to understand how much better shares held under a managed fund platform would have to perform to outperform ETFs/LICs.

You talk a fair bit about your advisor - is he paid by commission of the portfolio or on a fixed fee arrangement?

 

What did the advisor think of this?

 

With a share portfolio of $2,8M , plus I'm presuming a PPoR you've done well to date

15 different managed funds is diverse, have you worked out your total MER

 

Thanks @Mac Fields That's actually something I have been thinking about while reading the LIC threads recently. Firstly when we started the process 3 years ago I didn't know what an LIC is. The advisor pointed me to the managed funds. I haven't done an exact performance review of every managed fund compared to specific LIC's ( might have to run a few comparison's ) But I would guess some might outperform and others under. And next year the ones that underperformed the LIC's might outperform.

I guess the downside I see to LIC's for my strategy is I like to invest at regular intervals. I don't want to be buying in at premiums. Secondly I am already in all those managed funds. Will the cost and effort be worth while to sell out and move all funds into LIC's. Of the 2.8mill I would say around 1 mill would be in Australian equities managed funds. Do I just pull the 1mill and go LIC shopping? Thoughts?

The advisor is on a fixed fee. Being $8k a year. He also oversees the super accounts of my wife's and I which are invested in the same manner. BT wrap platform in a few managed funds. Though super amounts are fairly low. Working on building that up.

 

He was all for it. Only thing he said is keep IJR being US small caps to a smaller holding. I told him that tip came from my online forum Financial Opinion Giver.

 

Thank you Sir. Yes I'm fortunate enough to also have the Ppor paid down. I have kept the loan open with funds sitting in offset to use like a line of credit.

I have not actually worked out MER. MER is the fees the funds charge right? most sit between 1-1.5% and some also have performance fees on top. I have no issue with paying the fees as long as they deliver the results. If over the long term they can outperform the index after fees then I have come to the realisation I might as well just buy the index.

My only hesitation is do you go all just index? Splitting between index and managed or LIC makes sense. Looking at the 10 year or inception of most of the funds we went into they managed to out perform. Looking at the last few years most have underperformed. What to do , What to do????

Hence why I came to the conclusion of splitting down the middle for now.

 

Refer to the SPIVA posts from @Nodrog

As St Jack said "In Investing, you get what you don't pay for" i.e. high investment costs erode rather than enhance net investment returns.

 

@Big Al

The approach you are following sounds rational after cursory consideration. However, lets do better than that.....First thing to think about is the role of survivorship and hindsight bias in manager selection which is directly related to your comment above. Then let’s think about tax and related costs of swapping out the underperformers, because the end they all go that way that’s before even considering fees and the behavioral effects of the strategy.

Before you add any more ETFs or do anything - you need to do more reading. Bogle, Ellis, Swensen will be very helpful in giving you a very different view. I am picking up a strong action bias here - stop and take your time

 

Thank you so much for sharing your journey with us.

FP is stating the obvious. The goal is to overweight US small caps given the majority of cap weighted index ETFs VGS / VTS / IVV are heavily weighted to mega / large and to a lesser degree mid caps. Up to 10% maximum of portfolio would seem sensible.

I’m still bewildered given the FP is a great fan of indexing why he hasn’t suggested more investment in these funds in the past?

@The Falcon appears to be on the mark sensing an action bias. When I suggested IVV / IJR I was surprised you acted on this so quickly but then again the FP seemed to encourage it. I’m not sure this is a good or bad thing? Is the FP just agreeing to keep the client on side?

VAS and VGS typically would make an excellent major core of an Aussie based global equities index portfolio. Some would suggest that regularly investing in these is a no brainer. However when deciding on anything additional to this it might be worthwhile taking one’s time in deciding what really meets his / her needs. Simplicity is a wonderful thing in investing hence adding anything else to this core requires careful consideration.

 

A major thing I learnt from the GFC is to stick with broadly diversified funds not sector specific ones such as AReits. ASX 200 was around 50% down but the AReits index was around 90%:

 

@Big Al well done on your success so far.
Your ability to create wealth is something I aspire to.

I sometimes think FPs (not all as there are many that can add value) unnecessarily complicate things in an attempt to add value.

This is Especially evident when dealing with successful high performing people who naturally think hard work (research) and quality work (think reputable active managers) will result in alpha. The reality being the opposite.

Seems like most planners in a need to justify fees will invest across a range of fee hungry managers but how many will actually go anywhere near out performing the closest diversified index fund to their asset allocation, particularly after fees? And over extended time horizons?

Being spread across that many active funds statistically you would seem likely to underperform most benchmarks.

Also concerning is what seems to be a lack of conviction in the portfolio. The FP is investing your hard earned and as @Nodrog pointed out, if he believes in index funds why are they not a larger component?

It is all about you and for that reason I would suggest you measure your returns vs the equivalent indexes taking into account fees and weightings as you seem to be taking on greater risk for little reward.