How Do You Manage A Portfolio?

The Ascendia Portfolio Service is for investors who wish to build a diversified portfolio of high quality assets across multiple asset classes, while still making the necessary adjustments along the way to manage risk and preserve capital.

Our investment portfolios are created via a systematic portfolio construction process. Our focus is on obtaining investment returns with the least amount of absolute risk, and to grow and preserve capital over the long term.

The key steps of the investment process include:

  1. Asset Allocation
  2. Individual Asset Selection
  3. Ongoing Review and Analysis

This section discusses the first 2 aspects. Please refer to the menu for hte Reveiw Service page in reference to the third element.

Asset Allocation

Your asset allocation is arguably the most important step in the investment process as it will have the greatest impact on the overall risk and return characteristics of your portfolio.

Firstly however, you need to understand that investments are allocated into three broad asset groups:

Secure Assets:  these are assets with low to no volatility and are Government guaranteed (subject to limits) such as short dated Government bonds, and Government guaranteed term deposits and cash. In other words, these assets have no chance of permanent capital loss (subject to the Government not defaulting on their debt obligations).

Defensive assets: these are assets that exhibit defensive, income producing characteristics such as longer dated Government bonds, corporate bonds, managed bond funds, hybrids, and other debt securities, however they do have some capital price movement (up and down) and carry at least some capital risk.

Risk assets:  offering potentially the highest returns but also higher risk and volatility such as Australian and international equities and property trusts.

There are then three steps to the Asset Allocation Process – your Benchmark allocation, your strategic asset allocation settings, and the sub-group allocations within each asset class.

Here’s how it works:

1. Benchmark Asset Allocation:

As the name suggests, this is all about setting a benchmark asset allocation based on the stage of life you are at, overlayed with your tolerance for capital volatility. It’s like a starting point or equilibrium point. It is how you would be invested in a relatively benign environment where you are happy to be fully invested in each asset class.

For example, if you are age 65 and retiring, our Benchmark asset allocation has a 25 / 50 / 25 split between secure, defensive, and risk assets. This is due to the fact that predictable income requirements and capital preservation are high priorities.

2. Strategic Asset Allocation:

Once your stage of life / benchmark asset allocation is set, we then adjust these allocations from time to time depending on our analysis and interpretation of:

  • Prevailing key investment themes
  • Global economic risks.

This is the part that can make a substantial difference to your retirement, and is the piece that most people are missing (or do in a haphazard manner). It is all about risk management and capital preservation.

In practise, this will generally mean having a reduced (or no) exposure in "risk" assets (and some defensive assets) and a higher allocation to more secure assets for a period of time - if the risks are deemed too high relative to the assessed potential returns.

An example of this would be where we are not invested at all in risk assets such as shares, due to the elevated risks of a global economic recession. The objective is to try to avoid being invested in the wrong type of assets during major bear markets - which causes so much capital destruction.

Note that we won’t try to avoid the normal market corrections, becuase these are so fickle and risky to attend to. We are however focused - through the adjustmnet to asset allocatin benchmarks - on the longer term business cycles and avoiding the big downturns accompanying economic recessions and/or severely overvalued markets.

3. Sub-Group Allocations within Each Asset Class:

Within an asset class, there are various sub groups of investments.

For example, in defensive assets such as fixed income, there are a variety of ways to invest within the capital structure. As a result we need to create an appropriate mix of asset types / groups based on risk management and expected returns of these sub-groups.

Similarly in equities, there are real diversification benefits to blending both sub-sectors and strategies that may not be highly correlated.

Therefore, we will diversify between sub groups within asset classes to help us achieve our objectives.

Asset Selection

Once the Asset Allocation process is complete, we can then turn to choosing individual investments within those asset classes.

Investments within the portfolio are selected via screening techniques that combine (where applicable):

-        Fundamental quantitative analysis of asset quality and performance

-        Qualitative analysis including effects of the global macro environment

-        Appropriate entry points using valuation analysis

The quality of the individual portfolio assets is the absolute foundation stone of the investment selection process. If a prospective investment fails this test, we don’t go any further. It is in effect, screened out.

We are only interested in being invested in what we believe are the highest quality assets in an asset class.  Whilst this can be quite subjective, there are ways of quantifying and qualifying this process.

For any managed investments (such as a Bond fund) or exchange traded funds (ETF’s) our analysis will also include making use of independent research on the fund’s strategy, the skills of the manager and their historical performance through both good and bad market conditions.

Our preferred portfolio of direct shares consists mostly of high quality, large cap defensive businesses that have sustainable competitive advantages, a strong brand, and predictable cash flows. These types of companies ensure that you are at the lowest risk end of the share market, and that your risk of permanent capital loss is reduced as much as possible. It also increases your probability of getting a relatively more consistent outcome by sticking with companies that have sustainable dividend yields.