Oct 21

Investment Advisors – Active, Passive, Aggressive or Defensive?

It is not surprising that various investment advisors have different views on what are the best investment options at the moment. As it is exactly two years since the International Monetary Fund (IMF) met to first discuss the Global Financial Crisis, we felt that a distillation of some commentary from recent press articles may be of interest to readers.

According to James Dunn of The Australian newspaper, whilst volatility has always existed in the sharemarket, it has never been as confronting to investors as it has been during the past two years. In fact, for much of the past three years Australian investors have lived with volatility well above levels previously considered normal.

This market’s downside has, according to investment advisor Jamie Nemtsas, caused many investors to reassess their reliance on the sharemarket and much of the money now held in term deposits, a doubling since September 2007 to $200 billion, has been from those fleeing the sharemarket, whether totally or partially.

Mark Thomas of van Eyk Research, whilst supporting active investment managers comments that a real return of 3% – 4% pa should be regarded as an attractive investment every day of the week, and this is what term deposits offer – with zero risk thanks to government guarantee. He states that whilst this is on offer it makes absolute sense to advocate term deposits as good investments.

Research house Zenith Investment Partners considers that globally, due to a more severe downturn, developed world governments will be heavy bond issuers as they attempt to borrow to fund the numerous fiscal packages they have initiated as responses to the global financial crisis. It indicates that the Australian Federal government issuance is expected to reach more than $300 billion by 2013, up from about $55 – $60 billion in 2008.

Historically, government securities have produced lower yields than corporate ones, so reduced income will be a factor for investors (and for Governments if increased aged pension funding is required).

It is important for investors to regularly reassess their appetite for risk and not just wait for market fluctuations. Volatility is not necessarily an ideal definition of risk, it is simply a measure of variance in the prices of a stock or returns from an index over a period of time. Whilst the active versus passive debate has focussed on equities, investors also need to consider their fixed interest portfolios. However Mohamed El-Erian of PIMCO considers the risks are high for passive bond investors and that the levels of government debt and currency investment risk demonstrate the importance of actively managed fixed income exposure. Perpetual’s Richard Brandweiner says that fixed income assets should provide certainty and predictability, but unfortunately. In the last two years many fixed income investments proved to be lacking in defensive characteristics.

By 2016 analysts indicate that 30% of our superannuation assets will be owned by people relying on those assets as their primary source of income. With retirees increasing and living longer there is a constant view that a high proportion of their assets should be in growth, however not everyone is convinced that holding a relatively high allocation in growth assets in retirement is a good plan. PIMCO’s John Wilson argues that people should hold their age in bonds, and others support this view indicating that the downside of investing in equities for people who are unable to sustain large drops in their wealth should invest in annuity products which provide a guaranteed income stream over a defined period of time. However, these products can be costly.

The importance of maintaining strategic asset allocations applies at all levels and as it can be difficult to understand the risks and the market conditions in which they perform well and those in which they don’t.

At the end of the day, everyone is an individual, people are different and have differing needs and objectives. Whilst there are mechanical ways of measurement in investments, there is nothing mechanical about investing or investors. There is no one-size fits-all. So the bottom line is to seek professional advice from your investment advisor. Andrew Frith at The Self-Managed Super Specialists is here to actively assist you make the best decisions for your needs.  






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