Investment Management
Our portfolio construction for our underlying investment activities (with us and our investment manager(s)) is built on a simple reoccurring model below.
Our asset specific sectors for our investment activities are:
Cash & Fixed Interest
Our investment philosophy for cash and fixed interest is that we look at assets what we term “plain Vanilla” as they are managed with no enhancements and a shorter to medium duration. Our portfolios are an actively managed $AUD portfolio of high quality, short term, call deposits, cash equivalent securities, such as rated and unrated government and semi-government bonds, bank bills of exchange, corporate and asset backed promissory notes, and interest rate investment contracts (or equivalent).
There is no exposure to derivatives other than for hedging purposes and the relevant market return and to manage investment risk, is that solely of the underlying short dated portfolio.We operate the portfolio to provide stable income and preservation of capital through investment in short dated securities that provide a high level of liquidity and security. The portfolio maintains a very low risk and high liquidity characteristics. We aim to provide a return (before management costs) equivalent to the UBS Composite Bond Index plus % over a 3 year rolling period. The Investment Adviser will perform analysis and research on potential investments. We will consider, among other things:
- Economic factors that they believe are relevant to managing the portfolio;
- The historical performance of each potential investment;
- The historical volatility of returns and potential volatility in the future;
- Outlook for the investment and assessment of the risks to future returns; and
- If applicable, the credit rating of the underlying asset being proposed.
We will use internal and external investment advisers that will use their expertise to recommend a diversified portfolio of wholesale Australian bank bills and/or cash and cash style investments.
Multi-Strategy Income Investment (Fund)
Our Fund will only invest in Commercial loans in this asset category. This Fund’s mortgage portfolio would be classified as a “conventional” mortgage portfolio. The mortgage portfolio aims to achieve income by focusing on lending to small-to-medium enterprises (“SME”). We believe that due to this relatively unserviced segment of the lending market, we are able to command a slightly higher interest rate on these loans. A quick reference guide to our Commercial Loans can be found here.
This Fund only provides senior debt to the borrower secured by registered 1st mortgages. The Fund is able to invest in both fixed and variable rate loans which allow the manager to lock in rates on a downward market cycle and maintain a variable rate book on an upward rate cycle.
To further reduce exposure to some cyclical economic risks, this Fund’s mortgage portfolio will diversify across commercial, retail, residential and industrial sectors and by geography across the eastern seaboard. The Fund does not lend on specialist or construction or development properties. The Fund has moderately “conservative” lending criteria, of a maximum 66.6% loan to valuation ratio, with regular monthly interest payments and registered 1st mortgage security, which provides a cushion of protection to investors. We also believe that intensive management of a well diversified, short to medium term loan book coupled with a strong understanding and management of cash flow lending and exit strategies, supported by all borrowers contributing regular monthly interest payments, allows for active mitigation of default risks.
Securities
We view that ASX listed equities can provide a reliable income stream for risk averse investors. Over the long term dividends from listed companies have been less volatile than capital gains, although dividends have accounted for a smaller percentage of total shareholder return. It must be emphasized that the investment process is specifically intended to exclude “high yield” securities because these are likely to carry an unacceptable level of risk. With that proviso, we look at stocks with above average yield that do not necessarily carry above average risk. In many cases they are simply businesses which have low growth prospects or low reinvestment needs (“cash cows”). Our investment philosophy assumes that, for a given level of risk and of total shareholder return, some stocks will generate more capital gains than dividends, while others will do the reverse – the investment process sets out to identify the latter class.