As discussed in our last E-News, APC has introduced an evolution of our investment implementation called our CORE + Satellite approach.

For many years, APC has recommended a suite of low cost portfolios based upon academic research, which are designed to provide efficient access to investment markets together with the capacity to outperform over time.

These portfolios invest in the traditional asset classes: cash, fixed interest, equities and listed property, and into various sub-asset classes such as emerging markets. These are the Classic portfolios and range from the most defensive, Classic 30, to the most growth oriented, Classic 100.

To re-iterate the key tenants of our Classic Portfolio investment philosophy;

• risk and return are related
• diversification is essential
• markets work (that is to say, they are efficient when it comes to interpreting information and translating this in prices)
• structure explains performance

These portfolios and the underlying investment principles they employ, have served our clients well over many years and will continue to do so for many years to come.

Introducing the Core + Satellite Investment Approach

The objective of a ‘core and satellite’ approach is to harness the return provided by the broad market through a low cost ‘core’, and to include where appropriate, opportunities to diversify and achieve specific portfolio objectives or outcomes through selective sources. Examples of these individual portfolio objectives may be to reduce market related volatility, to enhance passive income or increase return opportunity (and risk profile).

The Classic Portfolio Suite

At the Core of this approach is one of the Classic portfolios.

From conservative through to high growth, this suite of portfolios provides a sound investment foundation.  APC reduces risk by applying significant levels of diversification at the asset class, sub-sector asset class and direct security level.  They are low cost, fully liquid (ie easily converted to cash) and aim to limit unnecessary trading costs.  The Classic portfolios are market linked which means they are not immune from market volatility risk and would be highly ‘correlated’ with broad market movement, both up and down.

Their aim is to moderately outperform the market after fees in the long run and for many the Classic portfolio will remain completely appropriate to their needs.

Satellite investments

With one of the Classic portfolios at its core, APC may now consider the addition of other investments.  These investments are viewed in bands which have varying liquidity characteristics (this relates to the ability to cash out an investment if needed) and portfolio objectives;

Band One: Targeted Strategies

Investments of this type tend to be fully liquid and may provide the opportunity to target or ‘tilt’ specific market segments in much the same way as we have tilted our portfolios to small companies and ‘value’ companies for nearly 20 years and continue to do so in the Classic portfolios.

The current investments in this band are;

• ESG: Environmental, Social and Governance (SRI – Socially Responsible Investing)
• Global Healthcare
• Equity Style Diversifiers: Investments that implement an investment style to allow the further diversification of the overall portfolio

There are six specific investments in this band currently however this may evolve and change over time.

Band Two: Low Correlation Strategies

Band two investments may be those with different correlation profiles to the traditional asset classes. Correlation explains the extent that one investment’s performance behaves when compared to another investment’s performance over the same time period. The addition of a less or uncorrelated investment into a portfolio can improve diversification and lower volatility.  Examples may include private or unlisted company funds, or income strategies, which have less reliance on the listed bond market.  Investments in this band may be priced monthly and have monthly accessibility windows (ie be less liquid).

The types of investments that are planned for this band are;

• Income: Higher income focus with less reliance on the listed bond market
• Property: Reliable income and stable capital preservation with no or little exposure to the listed Real Estate Investment Trust (REIT) market
• Shares: growth only investments which provide access to the unlisted companies market

There is currently one investment in this band (Shares) with an additional two (Income and Property) planned for inclusion in November.

Band Three: Opportunistic Strategies

At the outer band of potential ‘satellite‘ investment exposure would include investments which are opportunistic in nature.  By this we mean either they have been able to be purchased at a below market rate or they are performing well however require further capital and expertise to accelerate growth. These types of investments include – for example – exposure to niche unlisted companies (via a professionally managed fund structure).

 Investments of this type are typically priced monthly or quarterly and have no liquidity.  This can mean the investment must be held for a fixed term before investment capital becomes accessible.

Currently there are two types of investments that would be included in this band.

• Property: Assets which are purchased at below market value where a capital improvement program leads to increased rental yield and improved capital value
• Companies: Unlisted companies that are usually #1 or #2 in their niche market and are profitable however require additional capital and operational expertise to accelerate growth and prepare them for either an IPO or trade sale

There is currently one investment (Companies) in this band

Next Step

APC’s Investment Committee regularly considers and reviews high quality investments, which may be considered for inclusion in the above bands, with this an evolutionary and ongoing process.

It is important to note that reducing diversification or access to capital through alternative or ‘satellite’ investments can increase portfolio risk and will not be appropriate for all investors.  As such, it is important to fully understand an investment’s characteristics before a decision is made to include it in your portfolio.  APC would consider various factors with you – including your individual needs and objectives – to determine whether any of these satellite investments would be an appropriate consideration for you.

If you wish to discuss this in relation to your own portfolio please feel free to make contact with any member of the APC Advice team.