InvestmentPhilosophy
The result is peace of mind for the client knowing the risks are being managed, the opportunities are not being missed and that their lifestyle both now and into the future is secure. It’s why we are called Lifestyle Wealth Partners.
Lifestyle Wealth Partners (“LWP”) believe that clients define risk inmultiple ways and have different tolerance levels to each risk.
This is in contrast to the traditional portfolio construction approach, where risk is defined as volatility. This we believe can potentially lead to suboptimal decisions on behalf of, and by, the client. Further, LWP believe that the return characteristics of an asset class can be deconstructed into individual risk factors, such as valuations, inflation and term premium. LWP will seek to build portfolios based on these risk factors, in conjunction with chosen asset managers, with a focus on diversification and ensuring that the resulting portfolios are exposed to the intended risk factors, which in turn is based on a quantitative model as well as the investment team’s views on the market environment.
In terms of objectives, the portfolios focus on providing investors with the best possible return, given the risk factors they are exposed to and their expected range of returns, rather than trying to outperform a market index. The resulting portfolio for the client is therefore customised down to the individual with no one size fits all, however using a combination of technology and portfolio blending techniques LWP is able to act nimbly in a fast changing world to protect portfolios in tough market conditions but benefit from the upside that markets always offer.
1. Returns matter, but behaviour matters more
Even the most well-laid investment plan can easily be derailed by destructive investor behaviour
When it comes to achieving the goals set by an individual, family or business, charitable trust or group, it is the behaviours attached to those goals that have the greatest influence on the result. Investment returns can help to achieve goals (by being able to fund them), but unless a plan is put in place and followed, even the best returns will not be enough. Therefore, investments need to be managed in a way that won't lead to clients reacting inappropriately to market events, and potentially derailing themselves from their plan. For this reason, investment risk management is critical, as investment risk can lead to behaviours that will adversely influence a well-laid plan.
2. Price drives long-term returns
Evidence shows that valuation (price) is the primary metric that has any meaningful influence on long-term returns
Of the things that can affect the return on an investment - the price, growth of the underlying instrument/business, macroeconomics, etc - only one thing is within the investors control - price (and hence valuation). If you overpay for an asset, no matter the quality, the likelihood of receiving a good return is low, and no matter how poor the asset quality, if you pay less for it than it is worth you can still make a profit. Evidence shows that valuation is also the primary metric that has any meaningful influence on long-term returns - trying to forecast macro environments and pick market changes has no evidence of effectiveness, only valuation has that body of proof.
3. Asset class risks are driven by their underlying risk factors
Many risk factors are inter-connected across asset classes so understanding these drivers of risk is a crucial component of portfolio construction
Valuation is the greatest determinant of long-term returns, but the variability around those returns, and hence the risk attached, is driven by a multitude of risk factors. Every asset class has a number of these risk factors and understanding them is key to understanding the asset class. Further, many risk factors are inter-connected across asset classes, so to understand a total portfolio, you must be able to recognise and model these inter-dependencies. Examples include inflation, interest rates, credit risk, valuations etc.
4. Asset Allocation is the most effective tool for managing risk
The vast majority of the variability in portfolio returns comes from portfolio asset collection, rather than security collection
The vast majority of the variability in portfolio returns comes from portfolio Asset Allocation, not security selection - so Asset Allocation is the primary tool for managing risk. The mistake with traditional asset allocation is that the same regime eg balanced, is maintained no matter what market conditions, valuations or other factors exist. This would suggest a rather naïve process has been applied and we believe clients deserve better.
5. Diversify by underlying risk factor, not asset class
Diversification should be across sources of risk to construct portfolios that are truly robust during times of crisis
Diversification should be across sources of risk, or risk factors. Diversifying simply by asset class can inadvertently lead to doubling up on common underlying risk factors, meaning the portfolio is not actually diversified. When diversifying by source of risk, greater robustness is introduced to the portfolio - the core of true investment risk management.This increases portfolio protection and limits the impact of unintended consequences through risk concentration.
6. Diversify when it makes sense, not merely for the sake of it
When potential upside is high, and prices are low, concentrate.When potential upside is minimal and prices are high, diversify.
Concentrate positions when the potential upside is substantial, and your confidence is high (when prices are low), and conversely when potential upside is minimal, and confidence is low (prices and/or uncertainty are high) take more, smaller positions. This flexibility in investment managed provides portfolios higher levels of protection whilst not forsaking attractive investment opportunities when they arise.
7. Build robust rather than optimal portfolios
Rather than proclaiming to know the unknowable, we instead focus on the construction of robust over optimal portfolios
Optimal portfolio construction requires perfect foresight, something no-one has. Instead, portfolios should be built to be robust. The future is uncertain and can't be predicted. By focussing on robust portfolio construction, you give yourself a greater chance of weathering the variety of unforeseen storms your portfolio will inevitably have to face.
Why we are different
Lifestyle Wealth Partners will manage investment portfolios to strict risk benchmarks (not capital market benchmarks such as the S&P/ASX 200 or a stock/bond blended benchmark), with the aim to earn the best possible return consistent with those risk benchmarks.
The risk associated with capital market benchmarks varies through time and rarely coincides with clients’ risk tolerance, capacity or need. By managing to strict risk benchmarks, clients can be confident that the Lifestyle Portfolios will vary their capital market allocations to fit their specific risk requirements, and if or when those change over time, clients can change their allocations by varying the portfolio mix. The result is peace of mind for the client knowing the risks are being managed, the opportunities are not being missed and that their lifestyle both now and into the future is secure. It’s why we are called Lifestyle Wealth Partners.
