Investment Philosophy

At Direct Advisers our methodology is to develop appropriately tailored investment strategies prior to selecting investments. Our investment philosophy is concerned with maintaining an optimal balance between the level of risk and the level of return. To achieve this goal we aim to identify and understand risk factors, and to exploit these factors in a controlled manner utilising dynamic and strategic asset allocation models. Our philosophy does not seek to eliminate risk, but rather enhances your investment returns by retaining an appropriate level of risk, consistent with your personal objectives.

All of our investment recommendations are determined by this risk/return framework and our asset allocation models.

The stated objective of the Direct Advisers investment philosophy is to achieve above average investment returns consistently with below average volatility, over a five year period. We base our investment recommendations on a long term outlook, typically at least five years, and accordingly these recommendations are strategic in nature. The specific investment strategy that we use is called The Split Portfolio Method.

Direct Advisers also places a strong emphasis on understanding and managing change, whether this be economic change, regulatory change, market change or changes in your own personal circumstances. As well as this we continually review investments, asset classes and markets.   

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The Split Portfolio

The Split Portfolio Investment Strategy of investment was designed because many investors would like to have sufficient investment returns to protect their capital from inflation and at the same time do not want to see major fluctuations in the short term value of their investment portfolios.

The Split Portfolio Investment Strategy achieves this by splitting an investment portfolio into two main areas: being true fixed interest securities and quality Australian shares. Investment portfolios are further diversified through the inclusion of relatively small amounts of property and international investments where appropriate.

The fixed interest portion of the Split Portfolio usually comprises a mixture of term certain annuities, first ranking debentures from the major bank owned finance companies and government and semi government bonds. These fixed interest investments have been selected due to their security ratings and long term track records in the payment of interest and return of capital at the end of the investment term.  The fixed interest portion of the Split Portfolio usually comprises a mixture of term certain annuities, first ranking debentures from the major bank owned finance companies and government and semi government bonds. These fixed interest investments have been selected due to their security ratings and long term track records in the payment of interest and return of capital at the end of the investment term.

One of the traditional problems associated with fixed interest securities has been that investors tied their money up for the full term of the investment and would miss out if interest rates rose before their investments matured. This particular problem has been overcome with the Split Portfolio Investment Strategy by using staggered investment and maturity dates which usually results in part of the portfolio maturing and becoming available for reinvestment every six or twelve months.

The Australian share component of the Split Portfolio is comprised of investments in a number of specially selected leading Australian Equity Trusts. These Equity Trusts pay out regular income of which a large proportion may be tax free due to imputation credits. These imputation taxation credits may in some circumstances also be applied to the income received from the fixed interest component of the Split Portfolio resulting in a totally tax free income stream for some investors.

As well as producing income the Australian share component of the Split Portfolio is also expected to provide investors with significant capital growth over the medium to longer term thus protecting capital from the effects of inflation. Furthermore, this part of the Split Portfolio is not locked in and can normally be redeemed in part or in full within 30 days. Nevertheless investors who use the Split Portfolio Investment Strategy should have a medium to longer term investment time horizon of at least five years.

In addition to Australian fixed interest and sharemarket investments the Split Portfolio also incorporates a small amount of Australian property and international sharemarket investments where appropriate.

All Split Portfolios incorporate a cash reserve for emergencies.

The various investments that comprise a Split Portfolio can only be made on application forms found in the relevant prospectuses and customer information brochures.

It is important to realise that because everyone has different circumstances there is no single standard off the shelf Split Portfolio.  Each Split Portfolio is specifically tailored to the unique requirements of each individual client following an initial needs analysis and financial plan.  Because financial markets have shown themselves to be quite volatile it is important to ensure that the Split Portfolio be correctly implemented. This means that all of the investments that comprise the Split Portfolio need to be implemented on a progressive basis over a six to twelve month period. If this approach is followed the effect of any negative short term market movements upon the Split Portfolio will be minimised.

Once investments have been implemented using the Split Portfolio Investment Strategy it is important for there to be a continual investment monitoring procedure. This is because some of the fixed interest investments will mature each year and advice will be needed as to the most appropriate replacements. In addition to this, economic conditions change as do personal circumstances and therefore ongoing adjustments will need to be made to the sharemarket and other components of the Split Portfolio from time to time.  

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The Asset Allocation Approach

An investment asset allocation is simply the way in which an investment portfolio is diversified over the investment classes of cash, fixed interest, property and shares. Investors who stick to their asset allocation recommendations through all phases of the markets cycle are almost always rewarded. In comparison, poor investment returns are achieved by people who invest for too short a period, or who panic and change their portfolio at the first significant market downturn.

Our approach is to set recommended asset allocations for each investor risk profile and identify a time frame in which the expected returns would be likely to be achieved for each of the profiles. These recommended asset allocations and time frames are based on research and recommendations provided by Lonsec, Standard & Poors and Aegis.

Success in following these recommendations requires two things:

To ensure that the potential for loss is minimised, we regularly review the recommended portfolios. We follow a dynamic approach to adjusting these asset allocations, depending on the economic outlook for asset sectors over the forthcoming time frame. These adjustments create our current asset allocation recommendations.  Set out below are typical asset allocations for different types of investors. The actual asset allocations that we recommend to you may vary according to market conditions and the economic outlook at the time we make our recommendations.

Examples of Asset Allocations – Note these are not recommendations

Contact us:  enquiries@directadvisers.com.au

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