Statement of Investment Philosophy
and Approach

Our investment objective

Our investment approach is designed to deliver the specific outcomes that match the individual objectives of our clients. Through investment portfolio design we will seek to meet our clients’ goals with the lowest possible risk exposure.

Our investment beliefs

  • Choice of long term asset allocation and the appropriate diversification across asset classes and return sources are the main contributors to long term returns and risk management within investment portfolios.
  • At various times, active asset allocation is used to avoid unnecessary excessive risk and ultimately generate higher returns. This excessive risk avoidance and generation of higher returns via asset allocation is made possible by the tendency for asset class valuations to sometimes move well beyond their fundamental or long term value.
  • Within selected asset classes and sub-asset classes, market inefficiencies make it possible for active security selection decisions to add risk adjusted returns to portfolios. However, active management is expensive and can erode returns if it is pursued in the wrong areas.
  • The assessment of risk goes beyond measures of expected volatility, which is the primary risk considered in most asset allocation models. In particular, we are of the view that the level of exposure to equity risk in many Australian client portfolios is too high. At Skeggs Goldstien we acknowledge the long term wealth generation potential of equities but also actively manage the risks associated with equities and seek to diversify portfolios so that there are multiple drivers of return.
  • A “quality” filter is applied to all investments. Skeggs Goldstien conduct thorough due diligence to ensure return expectations are based on sound fundamentals. As a result, investment performance may underperform industry averages in markets characterised by excessive optimism; however, our prudential approach to investing is aimed at avoiding the full impact of any general downturn in markets.

Sources of investment return

Wealth accumulation is derived from an appropriate diversification across the following 4 sources of return:

1.  Interest in return for allowing the use of funds by others. Typically, a higher return is received the longer the term an investment is “fixed” (this is often referred to as the “term premium”). This return is accessed via the cash and fixed interest asset classes.

2. Rent and capital gain from the ownership of property. This return is accessed via the property and infrastructure asset classes.

3. Share of profit (dividends) and capital gain from the ownership of shares in enterprises. This return is accessed via the equities asset classes.

4. Investment selection (management) skill either within or between asset classes. This return can be accessed theoretically through all asset classes. In the Alternatives asset class, manager skill is sole driver of return.

Risk Management

Volatility – refers to the degree of variation or fluctuation in the value of an investment asset. High volatility is generally associated with high levels of investment risk. Increasingly, there is a wide range of risk and return profiles available within any one asset class and these should be modelled at the “fund” level in order to accurately assess overall portfolio volatility. Once the volatility of a portfolio is measured or estimated, it provides one measure of portfolio risk that can be used to assess portfolios over time and against accepted industry benchmarks.

Equity – holding investments in equities and certain categories of property, alternatives and fixed income (e.g. credit) provides an exposure to equity market risk. Equity risk can be measured via a calculation of the beta (co-movement) of portfolio returns to the movements in the equity market. Often, investor portfolios have excessive exposure to equity market risk and are highly exposed to capital loss as a result of share market declines. Appropriately measuring and managing equity market risk is a key component of the investment approach of Skeggs Goldstien.

Currency – although exposure to foreign currencies via unhedged overseas investments is likely to produce significant diversification benefits, this exposure does create the prospect of capital loss via an appreciation of the $A. Hence this exposure should be measured and managed. Given the tendency for the $A to move away from its long term fundamental value, there will be times when it is more appropriate to take on this currency risk.

Duration – holding investments in fixed term instruments (e.g. term deposits or bonds) creates a risk of loss (either actual in the case of bonds which are marked to market or an opportunity loss in the case of term deposits) should interest rates increase. Duration risk across a portfolio can be measured via the beta (co-movement) of portfolio returns to movements in the risk free yield curve.

Credit – credit risk refers to the risk that a borrower will not repay a lender. The level of credit risk is typically low for investments such as bank deposits but is considered higher for the high yield asset class within fixed interest.

Inflation – most investors will use some or all of their savings to finance future consumption spending. Therefore, investors are at risk of not being able to fund future consumption needs if their investment portfolios do not at least increase in line with the rate of inflation. Including assets in a portfolio that are more likely to keep pace with inflation is an important part of managing this inflation risk.

Portfolio Construction

The art and science in investment portfolio design lies in combining individual investments and asset classes in a way that optimises expected return within the constraints of multiple risk drivers.

As each investor’s capacity and willingness to accept various risks will be different, what is optimal for one investor may not be optimal for others. Differences in tax liabilities and return preferences (i.e. income or capital gains) creates another source of variance in the optimal portfolio. Further, the dynamic nature of economies and investment markets means that the optimal portfolio will change over time.

The complexity required to assess and balance the often conflicting drivers of portfolio design leads to many investors seeking the assistance of experts in constructing and managing their investment portfolios.

It is the role of Skeggs Goldstien to help navigate investors through this complexity.

We look forward to working with you to achieve your goals.