Axiome Quarterly Report

As markets absorbed the reality of a Trump election win in the US, we have seen the beginnings of a ‘great rotation’ out of global bonds and into global equities. In this report we discuss some of the investment principles that underlie the resulting modest drop in bond values. World bond markets are more than double the size of world equity markets, with massive trading volumes that rapidly assimilate new information into prices. As such, it is possible for the tradeable price of bond holdings to drop in response to an unexpected rise in the outlook for interest rates – as occurred with the Trump victory. This may surprise some investors who think of all fixed income securities as though they are term deposits held to maturity and then repaid. Whilst bond values are far less volatile than shares, the same core investment principles of risk, return and diversification are equally relevant. 

Axiome Quarterly Report

This quarter's Investment Market review discusses market movements and general economic influences in New Zealand and around the globe. Over the last quarter markets were generally favourable, having absorbed Brexit and the uncertainty around the upcoming US election.

Also in this issue we discuss a new perspective on investing and are excited to introduce the new Global Sustainability Fund that has been added into the model portfolios for many of our clients. 

Axiome Quarterly Report

In this report our Investment Market Review looks at the main events in the markets over the past three months. The past quarter has seen equity prices bounce back from the uncertainty and fall in prices that were seen at the end of 2015. However focus remains on commodities both domestically as dairy prices remain low and abroad with oil regaining some of its recent price falls. Monetary policy is also highlighted as inflation continues to hover at a mere 0.1%.

In our Investor Education article we look at the importance of defining asset classes when constructing a diversified portfolio. Sorting financial securities on a statistical basis, rather than an industry one, provides the best basis for a diversified investment strategy. We explain why this is important in maintaining risk exposure that is in line with investor objectives and the danger of misinterpreting what defines an asset class.

Axiome Quarterly Report

This quarter’s Investment Market Review looks at the key highlights in the markets over the last three months. Although there is continuing concern around China’s growth figures, this is put into perspective with past market movements in Asia. This also comes on the backdrop of a generally robust global economy, particularly in the US, with diversified portfolios performing better than most news headlines would suggest. The quarter also saw low inflation pressure both the Reserve Bank of New Zealand and Federal Reserve in the US to lower interest rates.

Our report also highlights the role that emotions and psychology can play in investment decision making, particularly in the short-term. However, evidence supports the merit of maintaining both a long-term outlook and a disciplined approach in portfolio management.

Balanced Portfolio Growth

The case for investing in shares is strong. Over time, the equity premium delivers returns in excess of less volatile asset classes. However, the inevitable short term fluctuations in asset value is the price an investor must pay when seeking the rewards of the growth strategies. Without risk there is no reward and, as the graph below shows, it is for this reason that growth asset classes will usually outperform cash and bond investments in the long-term. In contrast, the smoother returns of cash and bonds are defensive in terms of market volatility and may derive steady cash flow, but tend to provide a lower long term return

Investment of $1 for 20 years from 1995 to 2015. Data presented may be based on a combination of simulated and actual returns Performance includes investment of dividends and capital gains. Past performance is not indicative of future performance.

More often than not it is the large short-term movements in growth asset classes that make the evening news bulletin. However, with a long-term strategy it is important to put things in perspective. As the graph shows, overall the long-term growth of $1 invested in 1995 was significantly higher for growth assets, such as the ASX 300, than it was for defensive assets.

Nonetheless, the amount of risk an investor should take on will depend on their personal circumstances and investment objectives. By combining growth and defensive assets in a portfolio we soften the impact of the volatility experienced with growth assets, yet capture and consolidate much of the added return available over time. The ‘Balanced 50/50 Investment Portfolio’, one of Axiome’s investment strategies represented by the red line in the chart, shows this in action. It does experience some of the market volatility from its growth component. However this is anchored by the steady fixed income investments, leading to a much less bumpy ride.

A diversified portfolio, appropriately tuned to individual circumstances and risk tolerances, will maximize the probability of achieving s client's investment objectives.

Axiome Quarterly Report

In our Investment Market Review we look at how the markets have reacted to the past events of the quarter. Asset returns in the September quarter reflected the negative sentiment that first commenced in China and momentarily dominated news headlines around the world. However when investing with a well diversified portfolio for the long-term these events are well planned for. This quarter also saw continuing low headline inflation, increasing pressure on the Reserve Bank to lower interest rates and stimulate the economy.

Our article in this report focuses on the importance of diversification in an investment portfolio. It is no secret that the higher returns found in the share market comes at the price of volatility. Here we explain why it is important to spread your investments and how this reduces the overall volatility and risk of a portfolio investment.

Axiome Winter Update

Our Winter Update covers three topics:

Investment Markets - In the investment market review we summarise some of the key talking points in the markets over the last three months.  Although recent developments in both Greece and China have caused global markets to become a little unsettled, the performance of diversified investment portfolios through this period has been significantly better than the news headlines would have us believe.

Greek Debt Crisis - Given the intense media coverage given to the Greek debt crisis, we have also included a separate article called “Greece - The Path to Austerity”.  This catalogues how Greece got into its current predicament and outlines some tentative thoughts as to what could happen from here. 

NZ Trust Law - The final article focuses on how the New Zealand courts are interpreting (or reinterpreting) trust law, and on the current Law Commission trust law reform proposals.  This is recommended reading for anyone with a family trust.

Autumn Investment Update

The first article in the Autumn Update provides a general review of some of the major asset class returns contributing to portfolio performance over the last three months.                                                 

The second article highlights the prudence of diversification for risk management by drawing comparison with how insurance companies apply the same principles to guard against future uncertainties.

'Do it yourself' - is getting harder for directly held bonds

During 2015 nearly $6 billion of retail corporate bonds will mature in the New Zealand market returning cash to investors. Corporate issuers are increasingly going direct to the wholesale market with their new bond issues making it difficult for retail investors to maintain appropriately diversified direct bond and fixed interest portfolios.

Since the beginning of 2014, only 30% of new corporate bond issuance by volume has been available to retail investors. This trend has been largely driven by the growth of KiwiSaver, which is providing corporate bond issuers with a ready pool of wholesale demand.  It is easier and faster for issuers to operate in the wholesale market, without the need for retail documents and long periods of marketing and building a retail book of demand.  The more recent bond issues that have been available to retail investors have tended to be in securities with lower credit ratings or that are lower down the capital structure.  In times of stress, these instruments can behave more like equities than fixed interest.

The trend above underscores our longstanding preference for an appropriate weighting to bond funds within a portfolio rather than selecting individual securities. This provides more control over the diversification and quality of bond exposure, without compromising returns as seen below:

Our researched selection of bond fund managers and access to wholesale markets at low cost for both international and domestic fixed interest securities has increasing merit in an environment where doing it yourself, even with the aid of a broker, is increasingly difficult.

Media Opinion - Unhelpful Noise?

There are many competing opinions on investment markets expressed in the financial press that are mostly quite unhelpful to the average investor.  Any particular thesis about the market should not be regarded as new information.  It is opinion.

The competing views of market participants are already be reflected in today’s prices.  Markets very efficiently assimilate of all known information and the combined future expectations via millions of transactions each day responding to news as it happens.  Only new and unknown information that will impact investment outcomes from here – that involves predicting the future, which is speculation not investment.  

The chart to the right demonstrates the volatility of the NZSX 50 on a month by month basis over 22 years.  Basing your investment strategy on short term media opinion will be unhelpful in positioning for gain in this volatile environment, compared to a long term strategic asset allocation.