Investment Strategy

Maxim Wealth has as its core a strategy consisting of a portfolio of blue chip Australian and New Zealand equities, New Zealand investment grade fixed interest securities and offshore exchange traded funds, with limited exposure to actively managed funds.

Because of the cost of active investment and the fact that over an extended period very few active fund managers manage to beat their benchmark, we do not subscribe to an investment style based solely on actively managed funds. We rather utilise a core and satellite investment strategy which utilises different investment styles.

 

Core/Satellite Investing

This consists of the utilization of index funds and active investments working together. This  strategy is to build a low-risk, cost-effective core investment portfolio using broad-based index funds, while pursuing higher returns with more aggressive satellite investments in active funds, and individual stock positions.

Because of the high cost of investing in actively managed funds, these fees eat into investment returns. This is amplified by the fact that most active managers fail to outperform their relevant indices, with the result that the returns from actively managed funds have generally not justified the cost.
The utilization of exchange traded funds is an efficient alternative, as they are cost effective (with Management Costs* starting as low as 0.09% per annum) and you can build a core portfolio without worrying about the excessive management fees associated with active management.
The "satellite" part of core/satellite investments involves "alpha" holdings that are held with the intention of exceeding broad market performance. Here we would recommend actively managed funds with long track records of outperformance as well as directly held Australasian securities.

 

More about Exchange Traded Funds ( ETF’s )

The first fund that can be described as an exchange traded fund (ETF) was launched in the US in 1993. Steady growth ensued and by 1997 total assets under management in ETFs approached US$8.2 billion.
Since then, the ETF market has taken off. The message of cost-effective, diversified investing has hit home, making ETFs an ideal vehicle for modern investment strategies.

Fuelled by institutional, intermediary and individual investor demand, the worldwide growth of Exchange Traded Funds over the last ten years has been phenomenal*:

• Global ETF assets hit US$1 trillion at the end of December 2009
• There are 1,947 ETFs with 3,787 listings globally
• There are 110 providers on 40 exchanges throughout the world

*Source: ETF Landscape Industry Review, December 2009, BlackRock.

 

What does this mean for Portfolio Construction

It is our view that there is no need to rely on a strategy which relies predominantly on actively managed funds because of general lack of performance and excessive cost (which is masked to a certain extent as the client does not see any deduction as it is automatically deducted from the return.)

The utilisation of a core investment philosophy centred on exchange traded funds with actively managed funds and directly held securities as a satellite strategy results in a massive cost saving to the client, when compounded over time makes a huge difference to investment return.
This diverse, cost effective and transparent strategy avoids the multiple layers of cost associated with actively managed funds, providing significant cost savings for investors.

Because manager and related costs are automatically deducted from the fund, many investors are unaware of these fees which typically erode their funds by an average of around 2%.

The graph on this page shows that an initial $500,000 invested at 1.5% lesser annual costs, returns over 1.7 times the amount of an actively managed fund, assuming the same investment return over this period.