Strategic has access to and uses a range of
investment vehicles when building your portfolio. Each investment has
its own strengths and weaknesses. Strategic takes into account these
factors when building a portfolio.
Strategic’s non-aligned commitment means that a very wide range of options are available for portfolio construction and assets allocation in line with your profile. Your exposure to investments will be determined by the investment quantum, goals and objectives and investor profile. At each Portfolio Review you have an opportunity to confirm that you are comfortable with the types of investments that make up your portfolio. As always, our objective is to minimise risk and maximise returns. This is both an art and a science! Listed Fixed Interest
Securities (Bank Bonds & Corporate Bonds)
Fixed interest securities are initially offered to
the public through a broker and then traded on the secondary market.
They can be bought and sold in the same way as a share. Their price will
depend on the prevailing interest rate. There are Bank Bonds and
Corporate Bonds and their underlying security will be aligned with the
issuer, the Bank or the Corporate. Bank Bonds could be described as
wholesale term deposit. The advantage of Tradable Bonds is that they
provide a wider range of options compared with Term Deposits.
Often the yield will be higher and if funds are required before the maturity date they can be sold providing a high level of liquidity/flexibility. On the opposite side of the equation it is important to note that if interest rates increase an existing Bond will decrease in value. Strategic buys Bonds for clients on the assumption that they will be held to maturity but has the option to sell them if the market conditions are right. Clients need to be prepared to forgo liquidity to secure capital value if the market moves against them. In larger portfolios a range of bonds can be held with a range of maturity dates which assists with liquidity needs. Bank Bonds usually provide the best return for the level of security. Government Bonds are also available on the same basis but with a lower yield. Strategic will take a view on the trend in interest rates to optimise returns for clients. Bonds are subject to withholding tax at the investor’s tax rate. Direct Shares
Through its two brokers Strategic has access to
global share markets. A share in a specific trading company has the benefit /
probability of obtaining a return directly from the increase / fall of
the share price and any dividends paid from the success of the company.
The share will be exposed to the fortunes of the market sector in which
the company operates in. e.g. tourism is impacted by currency,
pandemics, economic confidence etc. In addition the performance of the
shares will be significantly influenced by the quality of the management
team. Investing in a direct share brings with it specific risk, in
other words, you are relying on one company in its field of operations
to do well. The risk is not diversified.
To diversify risk a number of shares would need to he held which were purchased on a range of different assumptions or markets. This would still leave you with “market risk”. If the share market falls because of a loss of confidence in the economic climate either locally or globally your holdings share price may fall just because of the negative sentiment in the “market place”. This can often create a good buying opportunity! If a wide selection of shares is held this also brings with it a fairly high level of administration and taxation reporting requirement. Some direct shares will fall within the Foreign Investment Funds regime. Whilst there are no external management costs there is brokerage to be paid for purchasing and selling the shares. Grouped Investment Class
This class of
investment seeks to use a manager who will apply analytical skills to
select and manage investments which, at very least, will provide
diversification and, at best, enhance returns. There are a variety of
structures for “grouping” investments. All reduce the
administration that would be incurred in holding the underlying assets
directly in addition to the fund selection. It is important to
understand the differing features of each of the types.
Open ended (Additional funds can
be added to the corpus)
Unit Trusts
These
are also known as Mutual Funds. The majority require a 10 year time
frame. They will often cover a particular sector of the investment
markets e.g. International Shares and each manager will have their own
mandate (Based on the Trust Deed) on what criteria will be used to
select the underlying investments. They provide an excellent way of
diversifying away specific risk but they will still be subject to market
risk. Units within the fund are held by the Trustee or Responsible
Entity on behalf of the investor. A fund manager could go bankrupt and
the assets would remain intact.
Investors must apply for units using an Investment Statement and can request a Prospectus. It is the task of the Trustee to make sure that the criteria for managing the funds is fulfilled by the manager. The manager deducts expenses and a management fee from the funds as detailed in the Investment Statement. Unit Trusts are “open ended” which means they are open for new funds to be added or taken out. Not all fund managers are created equal and not all will add sufficient value to justify their fees. Most will have an entry fee. It is Strategic’s practice to rebate the entry fee and apply a flat placement fee which enables a “hire and fire” strategy if the funds do not perform. For Strategic’s clients switching from one Unit Trust to another is done under the Portfolio Management Contract. If there is a run on the fund the manager has to sell assets to meet redemptions. In difficult market conditions this could be a “fire sale”. These popular funds have to retain a degree of cash to cover normal redemption requests so the entire fund is not invested in the main asset class. Mutual
Funds can either be taxed as a company at 33% or more commonly as
Portfolio Investment Entities (PIE’s) which reflect the investor’s
personal tax rate up to a maximum of 30%.
Exchange-traded
fund (ETF)
This type of Fund is relatively new to the New Zealand investor
and is likely to grow in acceptance. Strategic currently uses the Gold
Fund in this sector. Essential to have a 10 year time frame.
An exchange-traded fund is an investment entity that tracks an
index, a basket of assets, or commodities. Since it is traded like
shares, its price changes throughout the day. Its net asset value is not
calculated daily but is very close to its underlying assets. If ETF
prices deviate from the underlying net asset value then arbitrage is
possible. It is an attractive investment because ETF expense ratios
are lower than most unit trusts (mutual fund), tax efficient, and great
way to diversify.
Unlike a Unit Trust an ETF can be bought or sold throughout
each trading day. Closed-end funds are not considered to be
exchange-traded funds, even though they are funds and are traded on an
exchange.
ETF Structure
Unlike unit trusts, the fund does not sell or redeem their
individual shares at net asset value. Instead, financial institutions
purchase and redeem these shares from the ETF in large blocks, called
creation units. The purchase and redemption of these creation units are
with the institutions contributing or receiving a basket of securities
in the proportion held by the ETF.
Investment uses An ETF fund is an efficient way to diversify into the stock market, having similar features to shares. The ETF shares can be kept for the long-term or actively traded, with the following advantages:
Investment Trusts
Investment
Trusts are companies that invest in the shares of other companies. They
are a popular way of investing for income, growth or both. Essential to
have a 10 year time frame. Investment Trusts mainly feature on the London Stock Exchange although several are listed on the NZX but liquidity can be an issue with less traded trusts.
The money you invest is pooled with that of other investors and a professional fund manager then buys shares in a wider range of companies than most individual shareholders would have access to. By pooling money and investing this way even people with small amounts of money can gain exposure to a diverse and professionally run portfolio of shares, spreading the risk of stock market investment. Trusts often specialise in particular sectors and types of company such as communications or alternative energy producers. Others specialise in companies from different parts of the world. There are over 300 investment trusts responsible for the management of billions of pounds worth of assets on behalf of investors.
The benefits of Investment
Trusts
Your money is pooled with
other investor’s money, reducing costs and increasing investment
opportunities.
What makes Investment Trusts different from
other forms of collective investment? There are other kinds of collective
investment vehicles, for example, unit trusts. But investment trusts
have several special features that make them unique. Independent boards
of directors - because an investment trust is a company listed on the
stock market, it will have independent directors whose duty it is to
look after your interests as a shareholder.
Closed-ended
funds - shares in an investment trust are issued
only once, when the trust is created. This makes investment trusts
closed-ended: the number of shares the trust issues, and therefore the
amount of money it raises to invest, is fixed at the start. This enables
fund managers to plan ahead. Unit trusts, on the other hand, are
open-ended. They expand and contract all the time as people invest in or
leave the fund.
Gearing - As companies, investment trusts can borrow to purchase additional investments. Not all do so. This is called 'financial gearing' and allows investment trusts to take advantage of a favourable situation or a particularly attractive stock without having to sell existing investments. The idea is to make enough of a return on the investment to be able to repay the loan and make a profit. Obviously, the more a trust borrows, the higher risk it's taking but the greater the potential returns if markets rise. If the market drops then the investor must bear the losses in addition to the cost of the initial loan. Not all investment trusts use financial gearing and many of those that do, use it to very modest levels. Whether or not to use gearing is a decision taken by the fund manager and the board of directors. Other investment vehicles are unable to borrow to the same extent or as cheaply as investment trusts.
Buying at a discount - If demand for a trust's shares is low, the price can fall. When the price of the shares falls below its net asset value (NAV) this is called 'trading at a discount'. This may represent a good buying opportunity. If the discount narrows, there is the potential for enhanced returns. The prices of unit trusts are calculated depending on the value of their assets, so you can never buy them at a discount. If the share price rises above the NAV, the investment trust is trading at a 'premium'. This is rare but occurs where there is particularly high demand for an investment trust. The discount/premium is just one factor amongst many and should never be the sole reason for a purchase or sale.
Currency -The majority of
Investment Trusts used in Strategic’s Portfolios are listed on either
the NZX (but trading volume can be thin and liquidity sometimes
difficult but have less brokerage / stamp duty as in UK) or on the LSE
(London Stock Exchange). For liquidity reasons Strategic mostly used the
LSE. They are mostly managed from a UK Pound perspective so changes in
the value of the NZ$ and the UK Pound will impact. Most Investment Trusts will come under the FIF Tax regime.
Grouped
Investments but not Investment Trusts
There
are a range of investments which are similar to Investments Trusts but
are not regulated as such. They are traded as shares and in other
respects are similar to Investment Trusts. 10 Year time frames are
essential and risk are similar.
Non
Listed Closed end Funds
Funds are raised and then
invested in the mandate of the fund. Often the Fund manager will provide
a liquidity option by buying back units from the client. This often has
terms attached. The Man OM-IP Series is this type of Fund. The Capital
Guarantee that the Fund manager arranges depends on the funds being
committed for a set period of time 6-10 years. Access to funds in this
example are available after two years but the capital guarantee only
applies if funds are held to maturity. This type of structure is also
used with non liquid assets which are directly held like Property.
Multiplex Property Fund is an example.
Post Script
Strategic
will mix and match the investments to reflect your needs. Each of the
Five Asset Allocation Sectors will be populated with investments and,
where possible, exposure to any one investment will be limited to 10% of
your portfolio. This “lifeboat approach” has served our clients well
during challenging times. It is the impact of the overall mix of
investments that is ultimately important. Not all clients will have
every type of investment. |
AffiliationsSee the Financial Markets Authority site for details of the new Compliance Regime. http://www.fma.govt.nz/  Portfolio Construction Forum |
Types of Investments |