Inside Money

Business writer David Chaplin blogs on personal finance

Inside Money: Get off your assets

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Investors will want to define an appropriate asset allocation strategy before investing. Photo / Thinkstock
Investors will want to define an appropriate asset allocation strategy before investing. Photo / Thinkstock

The most important decision an investor can make, so the theory goes, is to define an appropriate asset allocation strategy before they actually plonk down the money.

So much in shares, a chunk in bonds, keep some cash, maybe a slab of gold etc...
Sit down with an asset consultant sometime and they'll tell you that. Not that most asset consultants will sit down for a friendly chat with your run-of-the-mill investor.

As one asset consultant confided to me once: "These people come to us with $5 million and they want us to design their portfolios... it's just not worth our while."

Rats and mice.

Nevertheless, the intellectual work performed by the asset consultants - housed in global entities such as Mercer and Russell or local firms like Eriksens and Melville Jessup Weaver - filters down into the portfolios held by us rats and mice via KiwiSaver and other superannuation funds.

Also, many financial advisory firms - more so now the industry is becoming tightly regulated - simply sell portfolios to retail investors designed by the higher beings up in the asset allocation division.

For example, the Axa (now AMP) owned advice group Spicers, sells funds to its clients built by the Axa Global Investors (now called something else beginning with AMP) team.

Anyway, as I was saying, the theory states that the asset allocation decision matters a lot, choosing the actual things you invest in, not so much. And sometimes - hey, just to be helpful - those asset consultants might have an implementation solution for you they had prepared earlier.

There's plenty of asset allocation studies, like the one referred to here, that appear to prove the general point: "A study by Ibbotson Associates concluded that asset allocation decisions determine about 100 percent of investment performance for those who follow a low-cost, long-term investing strategy."

That last bit about low-cost, long-term investing strategy is an interesting caveat, though.

Does asset allocation only work if you do it on the cheap?

It seems that the Auckland City Council came around to that point of view.

As these July minutes reveal, the now super Auckland Council has shifted all its active share investments into exchange-traded funds (ETF).

Previously, under the now-defunct Auckland Regional Holdings entity, the Council had about $300 million invested via its Diversified Financial Assets portfolio (DFA).

In an unfortunate piece of timing, the DFA shifted half of its money into global equities (through a number of expensive offshore managers) just prior to the GFC. While council documents indicate the DFA recovered somewhat since 2008, the fund lost about $25 million in the September 08 quarter alone.
Clearly, the new super Council couldn't stomach that volatility again.

"... all of the equity asset class is now fully invested in the iShares ETF Fund," the July minutes note.

Unclearly, there's no such thing as the iShares ETF Fund - instead there are numerous iShares ETFs that invest "across a variety of asset classes".

Get a consultant on to that, immediately.

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