Portfolio Construction – Our Approach.

In terms of Investment Advice, unlike most Advisers, we take very much a top down approach, doing reading and research at a macro level to try to make informed judgements as to the current state of the overall markets and therefore the risks current at the time.  That understanding along with your personal Risk Profile will determine the overall asset mix we will recommend for you, i.e. the level of defensive assets such as cash, term deposits or Bonds and the level of risk assets such as shares, property etc.

When choosing risk assets for you we construct a portfolio in two ways, firstly  using the longer term secular themes we have identified and secondly targeting shorter term tactical contrarian opportunities.

The longer term approach looks to capture broad economic trends and therefore potential “investable themes”. We then choose the best available asset managers who know and operate within the theme or buy shares in companies that have the theme as a “tailwind”.

Current Long Term Themes

Our current thinking and research has highlighted the following opportunities:

 1. Growing Middle Class in Emerging Markets

The Emerging Markets broadly include most of Asia, India as well as parts of South America and to a lesser extent Africa.

Many of the countries within these regions generally have young populations, lower debt (either government or personal), strong fiscal positions and are largely unrestricted in their pursuit of economic development.  The emerging middle class in these countries are a huge and growing market.

This Theme can therefore be capitalised upon by investing in Companies that:

• Provide the necessary raw materials (e.g. miners and mining service and infrastructure companies)
• Facilitate the energy requirements of advancing economies (e.g. Oil or LNG producers, uranium miners etc.)
• Sell products that meet the desires of an  emerging middle class such as health care, consumer discretionary items and branded luxury goods
• Provide financial services to those populations such as banks, insurance and real estate companies

2. Western World stagnation coupled with currency debasement

Over the past 40 years much of the growth in Western economies has been achieved by the use of massive amounts of debt, both private and government. This continuing debt binge became unsustainable and led to the Global Financial Crisis.  In response Governments in the US, Europe and Japan in particular, dropped interest rates to unprecedented lows and sought to reduce the value of the currencies by undertaking massive amounts of Quantitative Easing (which some describe as money printing).

This action has led to a number of investment opportunities or sub themes:

• With the compression of interest rates, the search for yield all around the world bidding up income producing assets. This theme has had a great run over the past five years forcing people into higher yielding assets (e.g. domestic Bank shares) in search of a reasonable return.  It may not have much longer to run.
• Volatility in currencies.
• Falling interest rates therefore rising Bond prices.
• A rising gold price and other precious metals, a theme which we believe has much further to run.

3. Demographics/Aging Population

The demographic profiles of most of the major Western Democracies highlight the effect of the Baby Boomers now reaching retirement age.  This massive cohort are generally well off financially so there is a great opportunity for companies catering for their needs in areas such as :

• Leisure travel
• Retirement investment products.
• Medical and pharmaceutical products.
• Aged Care.

4. Agriculture

Research points to a growing shortage of the foodstuffs that we take for granted here in the West.  There will be a shortage of arable land to grow the necessary crops and other produce to meet the growing demand and what land there is will be under pressure to increase yields.

Under this scenario, companies which own farm land, grow produce for food, provide farm equipment, fertilizers or crop protection products will have a natural tail wind to create wealth for their shareholders.

We would access the above themes using a mix of Direct Shares and Managed Funds and Exchange Traded Funds (ETF’s)

Tactical Opportunities

For the shorter term or tactical investments we take a contrarian approach looking for what we believe to be temporary mispricing of markets or individual assets.  This may take the form of an individual listed ASX company whose share price has suffered for something we believe to be transitionary or a particular sector or commodity which, for whatever reason, has become unloved or overlooked.

We will provide you with additional information on our current shorter term tactical positions as part of the Advice Process which includes a full review of your financial position and risk tolerance levels.