A guest blog by Liam Walker, Associate Advisor, Maqro Capital Pty Ltd
When we have conversations with our clients regarding risk management, we are often asked “Is my portfolio diversified from as much risk as possible?” With that, one of the most common misconceptions surrounding risk management stems from sector allocation within retirement portfolios, such as Self-Managed Super Funds or Trust Accounts. In particular, there exists a significant difference in asset allocation and diversity between the 99% of investment portfolios that exist, and what Family Offices allocate for their Ultra High-Net-Worth clients.
It’s an understandable dilemma – the majority of opportunities available to the typical investor are much smaller than those working with institutions and advisory services. The problem with this, however, is the sheer size of wealth that is required to work with these services. Costing up to $1M per year, the ability to get access to institutional-grade investments that allow for higher risk-adjusted returns are historically restricted to the public – with 72% of Family Offices globally reporting a net worth in excess of $US500M.
In other words, for many sophisticated investors, the ability to diversify their life savings and net worth to the same extent as Family Offices is an impossible task, almost solely down to a lack of resources available, and the limited access to opportunities within the market.
How Can I Get Access to the Same Opportunities as Family Offices?
As an investment strategy, diversification refers to the implementation of a mix of asset classes, an investment vehicle to limit exposure to any single asset risk, with the intention of yielding higher long-term returns whilst lowering the risk of individual holdings. Maqro Wealth aims to eliminate the many barriers faced by investors by leveraging over 120 years of expertise to provide the resources and tools required to make informed investment decisions for our Wholesale clients. Even within each asset class, there are various techniques that are applied to the Wealth Model Portfolio so that investment portfolios are regularly rebalanced to reflect the changing market conditions, across not only different sectors, but also investment assets as well.
- ASX Equities and Options
The key to building generational wealth is a stable core. Even if two portfolios held identical stocks, they can significantly vary in performance due to timing and allocation sizing of holdings. Due to heightened volatility, investors can reduce their risk in this space by targeting absolute returns via hedging to lighten the impact of macroeconomic instability. Monitoring allocation sizing across different sectors and sizes and incorporating sophisticated strategies such as hedging and options can lead to higher levels of diversification, as well as risk-adjusted returns of individual companies.
- Cash and Fixed Income
According to the ATO, the typical SMSF holds 45% or more of their assets in either Cash or Listed Shares, with almost 10% of all Retirement Funds holding all their investments in one asset class. In contrast, Family Offices are actively reducing their cash allocations, and planning to increase their holdings in fixed income over the next 12 months. The largest discrepancy between SMSF Allocations and Family Office Allocations is the fixed income allocations, which have on average an 11% differential.
Maqro acknowledges that cash is an asset in portfolios, however, fixed income continues to look attractive over the next 12 months as yields are expected to remain high in lower-risk instruments. As the share market continues to rise and move towards All-Time-Highs, Maqro looks to rebalance client portfolios towards more fixed income and cash equivalent assets, as the risk-to-reward shifts in favor away from equities and into bonds, private credit and other income producing assets.
- Global Exposure
Diversification isn’t only about avoiding downside potential, but also about capturing gains in potential opportunities. Optimal diversification requires investments to be spread not only across different sectors, but also markets as well. Investments across Global Equities, with the ability to go both long and short at the discretion of the fund manager, as well as international portfolios offer investors alternative exposure to generate absolute returns from professional fund managers and investment advisors.
- Alternative and Private Markets
The largest shift that Family Offices have made is the reallocation to alternative assets, which on average make up 44% of investment portfolios, compared to the SMSF average of 18.6%. The continued access to private markets gives investors access to innovative companies earlier in their lifecycle, and the historical outperformance of private equity and private credit to public markets in high inflation environments. For this reason, Maqro sees no reason why private markets should be limited to Family Offices and Institutions – by collaborating with investment banks and third parties, we can provide institutional strategies and tailored products to match the risk outlook, return objectives and investment horizon that is best appropriate for the market conditions and comprehensive due diligence to ensure the risk-adjusted returns are optimized for investors. Private market opportunities that exist through Maqro include:
- Structured Products: Pre-packaged investments that have assets linked to an underlying thematic, often combined with high-level derivative strategies to either:
- Increase yield to boost income for investors.
- Provide capital protection to limit downside losses.
- Implement leverage to maintain an equivalent exposure with limited upfront commitment to enhance upside returns.
- Property and Real Estate: Access to a steady flow of residential and industrial property opportunities that are typically out of reach to investors.
- Private Equity and Private Credit: Equity investments in private companies provide access to sophisticated early-stage companies with high growth potential. Family Offices have on average an allocation of approx. 26% in private equity opportunities, with the intention of reducing their allocation to cash and increasing their private market exposure.
As the Australian share market enters the third year since touching all time highs, it is natural for investors to be disgruntled with portfolio performance. Particularly with global economic uncertainty continuing to rise, it is essential that High Net Worth investors implement the right framework regarding risk management. This starts with a top-down approach to investing across a diverse range of asset classes, sectors, and regions to minimise risk through efficient diversification.
Maqro provides the opportunity, access, and infrastructure to ensure your wealth is appropriately allocated by operating a holistic perspective on the different markets; taking into account the risk adjusted returns so that as much market risk is removed and overall capital preservation is optimized.
If you need help with this process, please get in touch with us here.
Disclaimer: Maqro Capital Pty Ltd (ABN 50 615 683 442) is a Corporate Authorised Representative (No. 1249634) of Sanlam Private Wealth Pty ltd (AFS License No. 337927). Any advice contained in this material is general advice only and has been prepared without considering your objectives, financial situation or needs.