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 INVESTING |
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Smart Investing
Simplicity can have its own rewards
1 July 2007
Robin Bowerman
In this modern, multiple choice, instant access world complexity comes standard and to say the investment industry has turned this into an art form is an understatement.
But as we welcome in a brand new financial year it is worth asking the question - does a long-term investment strategy really have to be complex? Are there plug-and-play solutions for people who do not want to devote time and effort to managing their money?
Turn back the clock 25 years and investors and financial planners operated in a very different, much simpler landscape. Property trusts of the unlisted variety were both popular and sadly destined to disappoint while the other major investment vehicle was the generic diversified or balanced fund.
These were funds that gave their investors exposure to a mix of shares, fixed interest and property. A straightforward mix of the major asset classes where the fund managers decided the asset allocation in line with the fund’s risk profile.
Like many things in the investment world the diversified fund went out of fashion – but not because there was anything inherently wrong with the concept.
A lack of transparency around fees and performance meant that investors and financial planners alike turned away from the diversified or balanced fund in favour of specific sector funds where the investor or adviser had more direct control of the asset allocation mix. The benefits were that you could pick the “best of breed” managers across a range of asset sectors. Not unreasonable and it was also where advisers thought they could add value by picking the right managers. After all the idea of picking the best local and international share managers combined with a property manager and a small cap manager and a fixed interest specialist is alluring.
But with it comes complexity – not to mention the challenge of executing it efficiently - and the back office and administrative systems have had to become dramatically more sophisticated through the use of master trusts and wrap accounts to handle the administrative burden. Fund manager fees have come down in the past two decades and disclosure has certainly improved but we have added a new layer of fees to cover the administrative burden.
But of course the balanced fund did not go away in the superannuation world. Corporate, industry and retail super funds all offer balanced or diversified options and if you do not actively make an investment choice then chances are that is the default option your money will end up in.
But is that such a bad thing? A well-diversified fund that owns investments across all the major investment asset classes will never shoot the lights out on the performance tables compared to the hottest sector fund but at times like these when our sharemarket has delivered 32% as measured by the S&P/ASX300 index it is perhaps comforting to know that your money is also spread across other asset classes to diversify your risk.
In the super world about 70% of money is invested in the default diversified strategies. According to research group SuperRatings this week those funds are on track to deliver about 15% this financial year which is up slightly on last year’s 14.2%.
There is another way of looking at these products – they are designed as “set and forget”. These funds typically rebalance their asset allocations within the agreed ranges so you do not have to be concerned about making market timing decisions when markets are high (or low).
The bottom line is that investing for the long term can be as complex or as simple as you decide to make it.
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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