Grangewood Financial Management’s investment process focuses on factors the company believes are in its control. These are portfolio costs, risk targeting via asset allocation and tax minimisation.
‘Academic evidence shows most active managers don’t beat the market over the long term after costs. So we use predominantly passive investments,’ said Allan Harragan, financial planner at Maldon-based Grangewood. This explains why the team avoids making active asset allocation calls and short-term market views.
Asset allocation is underpinned by the efficient frontier. This shows the best possible return you can expect from a portfolio, given the level of risk the client is willing to take. If the adviser is happy with strategic asset allocation, Grangewood tries to leave the portfolio alone, apart from periodic rebalancing. Costs are monitored on an ongoing basis.
‘Our investment committee reviews asset allocation quarterly. But we don’t generally expect to change it often, as we don’t make tactical changes,’ Harragan said.
‘We conduct a whole-of-market review of funds annually. But all recommended funds are assessed on an ongoing monthly basis as part of our valuation and review system,’ he added. The team’s selection of low-cost index funds and exchange-traded funds (ETFs) has driven the performance of portfolios over one and three years, according to Harragan.
Grangewood’s research has, for some time, indicated short duration bond funds have a better risk-return profile than longer duration bonds. Against a backdrop of rising bond yields and higher interest rates, Harragan notes the market has finally moved to this position.
‘We also believe in reducing credit risk. So we concentrate on funds with high-quality holdings,’ he said.
The team considers equities give investors the chance to grow their capital in real terms in the long term. But it has also been preparing for a market correction for the past year.
There may be trouble ahead
The risk of further market volatility must not be underestimated, Harragan said. ‘I believe markets are efficient over the long term. But they can also be irrational for very long periods of time,’ he noted.
Over the very long term, the team likes emerging regions such as India and Africa. However, Harragan said they had not yet tested what the effect of adding further exposure to these regions would be from a risk-return point of view.
*Excludes platform charges and adviser fees. Includes charges on constituent funds.
Data to: 28 February 2018