article 3 months old

Rudi’s View: All-Weather Model Portfolio

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Oct 04 2018

By Rudi Filapek-Vandyck, Editor FNArena

Last week a reader sent through the following questions regarding the FNArena/Vested Equities All-Weather Model Portfolio. I have decided to share my response with a broad audience as I think many more might be interested.

1) What are the exit conditions if someone elects to exit the fund and close the SMA account?
2) I tend not to invest in stocks related to gambling, alcohol/tobacco and banks in general. Do I get to choose if the fund decides to invest in those stocks?
3) Portfolio performance of 8.35% pa since inception (close to 4 years) is good but not great so far. Do you anticipate better performance (> 10% pa) going forward?

My responses:

1) What are the exit conditions if someone elects to exit the fund and close the SMA account?

One of the key factors behind our decision to run the Model Portfolio via Separately Managed Accounts (SMAs) is the wide-ranging flexibility involved. You can open an account, transfer funds, reduce funds, add more funds, and close your account at any time and at your own volition while having day-to-day insight in which shares are kept, bought and sold, the respective allocations, changes, dividends, costs and performance.

If you decide to join through FNArena you will receive a small discount on costs, but all-in-all most costs are related to platform, admin and license which are pretty much set in stone unless competition forces the platform operator Praemium to lower its standard fee. (This is not inconceivable but hasn't happened as yet).

When asked about costs I usually respond with approximately 1.5% per annum. The "approximately" refers to the fact some costs are related to the size of the funds allocated plus a minor part stems from potential and unpredictable brokerage. The latter is a tiny cost under all circumstances.

Importantly, and directly related to your question, there is no cost for closing the account with Praemium and Vested Equities; once you withdraw all funds and close down the account you simply stop paying any further fees.

Here is the full overview of the costs involved:

Minimum participation is set at $20,000.

2) I tend not to invest in stocks related to gambling, alcohol/tobacco and banks in general. Do I get to choose if the fund decides to invest in those stocks?

Unfortunately, wide-ranging flexibility does not equal unlimited flexibility. Investment decisions are made for the Model Portfolio and they are being replicated across all SMAs connected. As said above, every investors has access and can make changes anytime about how much funds he/she allocates, but the process cannot have too many exceptions and discrepancies or it simply won't work properly.

The whole idea behind the research into All-Weather Stocks is to find high quality companies with many years of growth ahead of them, that can be owned for many years in the Portfolio. You will find that high quality mostly equals companies that take good care of their staff and clients, communicate well with all stakeholders, invest for the long run and make sure they do not destroy tomorrow's future for a quick benefit today.

Investors globally are increasingly adding Environmental, Social and Governance (ESG) filters to their toolbox when assessing present and future investments and here at FNArena we find All-Weather Performers/High Quality companies are usually already using the same blueprint.

Portfolio stalwarts like Amcor and Orora might be closely linked to tobacco, sugar and waste, but these companies are also at the forefront of new technologies and recycling initiatives for the global packaging industry. Long held Portfolio constituent NextDC has decided to equip all of its data centres with as many roof solar panels as possible.

DuluxGroup is, as I understand it, a core holding for Ethical Partners Funds Management. The company equally is putting in place solar power for a new factory. The company is involved with the 'Paintback' program which aims to be a more responsible pathway to get rid of leftover paint.

Possibly the one constituent that is most likely to trigger some controversy/criticism is Aristocrat Leisure. We thought long and hard before we added this stock to the Portfolio. It is there not because Aristocrat is part of my selection of All-Weather Stocks, but because it has transformed itself into a prime growth story that still has many more years to develop.

Note as the concept of All-Weather Performers is exactly the opposite of miners and energy companies, we automatically shun coal, steel, aluminium, fracking, and other contentious business models. Australian banks are not excluded by default. If the sector ever gets back to its mojo of the 1990s and 2000s we might reconsider them as All-Weathers, but I very much doubt whether such a scenario could possibly be on the horizon in the foreseeable future.

I share my selection, insights and updates on All-Weather Performers regularly with paying subscribers at FNArena. There is also a dedicated section on the website, as well as eBooklets and two published books. Feel free to get acquainted with the companies and sectors that form part of my research and analysis. Needless to say, my research and analysis are continuously ongoing. New insights will be forthcoming and they will have an impact on future investment decisions.

3.) Portfolio performance of 8.35% pa since inception (close to 4 years) is good but not great so far. Do you anticipate better performance (> 10% pa) going forward?

I think a little bit of context is required here. When we sat down in 2013-14 to prepare for the chosen investment mandate, we very much believed that future investment returns would be lower than the circa 11% long term average the Australian share market was exhibiting at that time. That assessment has proved to be correct.

We thought circa 8% as an average per annum looked both reasonable and achievable. Thus far, the All-Weather Model Portfolio has outperformed those expectations. A little surprising maybe, is that the ASX200 has equally performed better than 8% on average, despite going through numerous periods of difficulty and weakness.

Note the All-Weather Model Portfolio has outperformed the broader share market since January 2015 ("inception") in all six months periods except for the first, when we started with 100% in cash and the share market was rallying, and the second half of 2016 when en masse portfolio switching out of defensives & winners and into laggards & cyclicals temporarily dominated the market.

Among the promises we made to investors are lower volatility in price movements and a lower risk profile, and history thus far shows we have been able to deliver. In particular the lower risk characteristic implies the portfolio return is highly unlikely to shoot up to 25%, 30%, 40% or higher. In the fabel featuring the hare and the tortoise, the Portfolio very much resembles the tortoise who crosses the finish first, having approached it in a steady and gradual manner.

But the context equally involves other funds, portfolios and strategies. Only this morning I opened a fund manager's newsletter which showed the following performance update: one month performance -0.99%; financial year to date: 0.02%, calendar year to date: -3.22%. However, the number to advertise remains the performance since inception: 198.58%.

This is typical for the large majority of fund managers in Australia. Long-term outperformance mainly stems from halcyon times many moons ago that still compensate for the fact that returns have dropped significantly in recent years. If you visit websites for large listed managers, such as Perpetual and Janus Henderson, and look up respective funds performances in Australia you're most likely to find the numbers (even before fees) are not keeping up with the broader index.

The FNArena/Vested Equities All-Weather Model Portfolio has beaten the index. We just updated performance numbers until the end of August for our brochure (see below).

The third factor to take into consideration is the Australian share market is one of only few to not experience a negative performance to date in the running calendar year of 2018. I wouldn't necessarily exclude the fact that 2019 might turn out quite the challenge, with slowing growth, ongoing Fed tightening, rising inflation, local elections and more Trumponomics just a few factors that come to mind.

Of course, financial markets have surprised in a positive sense since the global turmoil of early 2016, and they may well do so again next year and the year(s) thereafter. But I am not sure whether anyone can confidently promise you in excess of 10% annual return on your investments. I certainly won't be making any such promises.

Regarding the performance update below, one has to take into account your personal return will also be determined by the timing of your SMA, plus for a Portfolio that has run for less than four years, the significant set-back experienced in the second half of 2016 still has a large impact on the averages. Only time can change that, assuming we can continue our track record thus far.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)

P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to My Alerts (top bar of the website) and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.

P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms