What We Do

The Benefits of Asset Class Investing

The PFS approach to investing is underpinned by the understanding that:

You need a strategy
Markets are efficient
Risk and return are related
Diversification is essential
Structure delivers performance
Portfolios must be tailored
Attitude is everything

These principles are not unique, and many financial planners implement them by using managed funds. However, the inherent problems of conventional funds management are becoming increasingly recognised.

Active Funds

Active funds are run by well-informed managers with specific fund strategies or styles. But because fund managers charge for their services – typically between 1% - 2% - they must beat the overall market by at least this amount only for an investor to ‘stay even’ after costs. To add value, they need to beat the overall market by at least 3% - 4%.

As higher performance can only be achieved with greater risk, investors in active funds are exposed to higher levels of risk without enjoying the full rewards of exposure to this risk. If you try to spread risk with a portfolio comprising a number of managed funds, you may find instead of diversifying, you have actually concentrated your client’s investment. Alternatively, you may find a stock sold by one fund, has been bought by another – in effect, your client has had to pay transaction costs and capital gains tax for continuing to retain an investment in the same company.

Passive or Index-linked Funds

The simple premise of the index fund is to replicate a stock exchange index – for example, the ASX 200. But because passive fund managers must replicate the index at all times, they have no control over fund turnover – even if this means repeatedly buying and selling significant volumes of the same stock over the course of a year, with associated transaction and tax costs.

The Asset-Class Investing Solution

Fund managers who subscribe to the asset-class investing philosophy, combine the positive features of both active and passive fund management, while avoiding some of the pitfalls. The asset-class investing solution focuses on those aspects of investment fundamentals that can be controlled, namely:

Diversification (i.e. allocation of assets)
Transaction costs (buying and selling stock)
Taxes (especially capital gains tax)
Investor attitude

Pre-set investment strategies

PFS, through Plan B Trustees Limited, provides a range of managed funds with pre-set investment strategies. These provide a range of varying investment return and volatility options which are tailored to meet the goals and risk profiles of a variety of investors. All of the pre-set strategies have been carefully designed to provide broad diversification and reliable asset class exposure with low costs. These funds have been constructed using the following principles:

Asset allocation – not stock picking and timing

Nobel Prize-winning research of researchers Markowitz and Sharp, as well as the work of the University of Chicago's Eugene Fama consistently show that longer term investment performance is more dependent on buying and holding certain asset classes (such as 'blue chip', 'growth', or 'value stock') rather than buying and selling individual stocks in an attempt to out-perform the market. The ratio of asset classes any individual investor has in a portfolio will depend on your goals and risk profile, which will already have been identified. Typically, younger investors seeking to build capital will opt for a managed fund with a higher risk: return ratio (such as those with a higher allocation to equities) while investors closer to retirement, focusing on preserving capital will choose funds with lower risk: return ratios (offered by asset classes such as fixed interest investments and cash).

Diversification

Because you participate in a single fund, with a wide spread of underlying investments, you avoid the risk of concentrating investments. Moreover some funds available through PFS provide exposure to asset-classes outside equity markets, such as property and fixed interest.

Transaction and tax costs

Another benefit of participating in a single, managed fund is the minimisation of transaction and tax costs. Unlike passive funds, which must constantly churn stock to replicate the index, or active fund managers, who attempt to beat the market by buying and selling specific stock, the asset class investing methodology follows a longer-term, buy and hold strategy which has the added advantage of minimising both transaction as well as tax costs.

While these costs may appear to be modest, when adopting a longer-term approach to investing, a saving of 1% - 2% compounded over, say, twenty years, has a significant impact on your ability to secure a client's wealth management goals.

Summary

In overall terms, the asset-class investing methodology is one which seeks to deliver a positive investment experience, helping clients reach their financial and lifestyle goals with more certainty, less risk and greater control.

Founded on our understanding of successful investing, and identified in the Seven Secrets of Investment Success, the Plan B approach provides a strategy which is aligned to efficient markets, where unrewarded risk is avoided, where diversification is ensured, and the structure ensures that transaction and tax costs are minimised and that your portfolios are tailored to achieving your clients' goals.