How we’d invest $1m today

Luke Laretive

CEO & Investment Adviser

lukel@senecafs.com.au
(03) 8639 1600

Level 4, 125 Flinders Lane, Melbourne VIC


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This investment report was written by Luke Laretive, co-founder of Seneca Financial Solutions. Seneca holds an Australian Financial Service License (AFSL No. 492686) and is regulated by the Australian Securities and Investments Committee (ASIC). The information contained in this email is general in nature and does not take into account your personal situation.

Please read our full disclaimer further down the page.  You should review our General Terms & Conditons and other relevant documentation at senecafs.com.au/resources

Step 1: Define your risk profile

There are many ways to skin this particular cat, but in the interests of simplicity and the purpose of this article (a framework for further research) I’m going to run with the 4 common risk profiles (and their associated ‘standard’ growth/defensive allocation) similar to what you’d see at an Industry or Retail super fund.

We broadly group traditional asset classes into “Growth” and “Defensive” buckets, with growth assets designed to generate the bulk of our returns, while defensive assets help to mitigate – delivering positive or less negative returns during periods of volatility.

Figure 1. Example of Typical Risk Profiles Categorisation w/ Allocation

How do I know what’s right for me?

Typically (though certainly not always) high-growth investors are younger, working-aged people with longer investment time horizons and more opportunities to contribute additional savings to their investment account.

A typical conservative investor might be an elderly person (over 80) who is drawing on their investment each year, spending modestly and predictably.

Though this is ultra-stereotypical… and just not even close to reality. A trust fund beneficiary at 35, who works part-time at a charity is unlikely to pursue a high growth strategy.

Similarly, a retired company director who’s spent the majority of their life, with the majority of their wealth, tied to the success or failure of a single, growing (but volatile) company, is likely to be unwilling to invest the majority of their capital in bonds, regardless of what the textbook says.

The short answer here is if you aren’t sure, book an appointment with us and we’ll help you define your risk profile, objectives and implement a portfolio that’s going to align with those parameters and achieve your goals.

What’s a reasonable expectation for risk and return?

Here’s some historical context (remembering that this is past performance, and it is proven to have limited predictive power over what matters, and that’s future performance).

Figure 2. 10-year ratio analysis – multi-asset indices (Jan 2024)

Source: FE Analytics

Note: Indices used are ACS Mixed Asset. Index asset allocations vary within ranges and the allocation to growth assets listed above is the ‘neutral’ setting for that particular index, over the period. It’s also important to point out there is no industry standard definition of “balanced”, “conservative”, “growth” or “high growth” risk profiles – regardless of the definition, investors should compare products based on their allocation to growth and defensive assets, (i.e. what’s in the box) not the label on the box.

The mindset of this approach is to define your risk profile based on your particular goals and circumstances, and while you’ll change the underlying investments as required, you’ll only change your overall asset allocation when you rebalance.

At Seneca, we aren’t that keen on bucketing clients into these strict classifications. If we are providing personal advice, we’ll discuss your goals and your attitude to various types of investments – working with you to define (and over time, refine) the approach. Each client gets a completely bespoke solution.

If you wanted to attempt to dynamically allocate between growth and defensive asset classes, you could go a bit further and set risk parameters on your chosen profile. I’ve provided an example below, but these ranges could be widened or narrowed, in line with your investment process.

If you decide to dynamically allocate between growth and defensive asset classes, you’ll likely want to build a ‘reference portfolio’ to measure your success (or lack thereof) in moving money between equities, bonds, cash etc.

The reference portfolio should be aligned with your selected neutral setting in each asset class and can act as another ‘benchmark’ for you to compare your actual returns.

We can’t ‘time the market’ here at Seneca, so we don’t advise clients to try and dynamically allocate between growth and defensive assets. However, we do tilt our model portfolios every month to align with our views on relative value and expectations of the future.

We will get to how that happens and what our current tilts are shortly.

Step 2: Benchmarking

We’ve touched on the respective ACS Indices, and these could be perfectly sound benchmarks for your portfolio at your chosen risk level. Similar indices are provided by the likes of Morningstar. You could also use multi-asset ETFs such as those provided by the likes of Vanguard or Blackrock.

If you don’t feel any of these are representative of your particular asset allocation – blend two or more options.

At Seneca, clients receive a custom blended benchmark based on their particular and individual asset allocation. Some common (not exhaustive) constituents of these custom benchmarks include:

It really depends on what the client is investing in (specifically).

Benchmarking is the cornerstone of all investing.  Without being able to objectively measure and attribute your returns, investors are left with only absolute returns (i.e. has my portfolio gone up or down, relative to what I paid for it?) 

While absolute returns are important, particularly for meeting specific goals in the ‘real world’, without adequate and accurate ‘context’ (i.e. the next best, viable alternative) you’ll never know if your results (and the efforts you expended to achieve them) stack up in the big bad world.

2a) Common benchmarking errors

When it comes to investing in shares, bonds, and other non-direct property investments, I think 90% of the general public’s dissatisfaction is related to inaccurate measurements, unrealistic expectations, and inappropriate comparisons.

Conversely, I’d argue that Australia’s love affair with direct property is largely attributable to their misunderstanding of leverage, inflation, and infrequent measurement. (Calm down! I’m not saying direct property isn’t a good investment, my point is you probably don’t compare apples and apples.)

CASE STUDY

Let’s use a hypothetical person, Mr. Jones, as a case study.

  • Mr. Jones owns a share portfolio of ASX50 companies.
  • He’s heavily focused on dividends and franking credits.
  • He spends the dividends he receives on his lifestyle.
 

Mr Jones looks at his portfolio and is annoyed – he started with $1,000,000 in early 2022 it’s now only worth $1,040,500 (an annualised return of 2.01% pa) in Jan 2024.

This is an unreasonable attitude, as Mr Jones is ignoring the dividends he’s received – which over that period total c. $90,000 (about 4.50% pa). Mr Jones’s TOTAL return for the period is closer to 6.51% pa.

Despite explaining this to Mr Jones, he’s STILL annoyed! Despite buying all the same stocks, at all the same weights and adjusting for his dividends, his portfolio has underperformed the S&P/ASX 50 by 0.39% (it did 6.89% pa over the past 2 years.) 

Why?
It’s because Mr. Jones has neglected to account for the impact of his withdrawals – or to put it another way, his lack of dividend reinvestment.

Had Mr. Jones reinvested his dividends as soon as they were received, he would have compounded his capital gains from a larger base, increasing his overall returns.

Mr. Jones is also neglecting the value of the franking credits he received – the value of which varies from person to person, and year to year, and is redeemable via a tax return. In a tax-free environment, franking credits can drive the dividend yield of the ASX50 up a further 0.70% pa to 1.10% pa.

Summary

To successfully invest in the markets, you need time and conviction. And one of your key tools for developing conviction is data. It helps you understand the inevitable ups and downs that come with holding an investment that gets priced every minute of every day.

But if you’re looking at the wrong dataset or get started with unrealistic expectations, it’s unlikely you’ll have sufficient conviction to succeed, you’ll ‘cut your losses’ too early and fulfil your own prophecy.

Step 3: Manager Selection

Assuming you have access to adequate deal flow and the ability to originate investment opportunities across geographies and asset classes, you’ll have a daily task of sifting through potential investments to improve your portfolio and get ahead of your reference portfolio.

Growth assets are made up of local and international equities.  Defensive assets are typically bonds and other fixed-income securities.  Alternatives, depending on the nature of the individual investment, can be Growth or Defensive assets. 

While the above provides some insight, how we compare and contrast managers is more nuanced than sorting for the highest-return products in our investment universe.

It’s important to understand how managers within an asset class, and the wider portfolio, enhance or detract from performance metrics (risk and return). If for example, you have two negatively correlated funds, equally weighted, chances are you’ll never make any money.

A typical “growth” portfolio at Seneca today looks something like this:

Notes:

 

We can seamlessly include/remove managers as we see fit and these changes are applied to all clients, at the exact same time, at the exact same price and aligned to their specific asset allocation.

A few explanatory points:

  • In equities, we are overweight Australia, relative to the rest of the world.
  • And inside Australia, we are currently overweight ‘quality’ and small caps.
  • Global equity is tilted to emerging markets on valuation grounds, relative to the benchmark.
  • We are overweight investment grade (IG) corporate and government bonds, relative to sub-IG in Aggressive Income, as there is adequate yield on offer (in our view) from lower credit risk products.
  • In Defensive Income, we currently are tilted to Government bonds, with above-average duration.
  • Absolute Return is in roughly its neutral setting, with exposure to systematic macro, market neutral, and multi-strategy funds. We continue to prioritise liquidity.

If you’d like more information about our specific holdings in each SMA, or more detail on why we’ve made some/all of the above tilts, book a 30-minute chat with me below and I’d be happy to walk you through it.

Why don’t you buy any direct shares?

We do pick stocks as well, but only where we have a competitive advantage.

The Seneca Australian Shares SMA (which makes up 25% of the Australian Equities SMA) invests in 20-40 high-quality companies from inside the S&P/ASX 200. We’ve been running this particular model for over 4 years and generated 12.47% pa returns, outperforming the S&P/ASX 200 Accumulation Index (purple below). 

Seneca clients access this product (like all our retail products) for free – we only charge for our advice in totality.

Peer Group = FE Fundinfo Austrailan Core Strategies Equity

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Product Disclosure Statements (PDS) and other relevant documentation can be found at: senecafs.com.au/resources/

The Seneca Australian Small Companies Fund is open only to qualified sophisticated and professional investors (wholesale investors) and invests in 20-50 sufficiently liquid, small and mid-cap ASX-listed companies, with a preference for high-quality, profitable and growth-focused businesses. The product has a 0.00% pa management fee with a 20% performance fee on any gains above the RBA Cash Rate.

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4. Things I haven’t covered

Outside of the scope of this article:

  • How to source access to an adequate array of high-quality investment opportunities.
  • How to source and manipulate accurate, timely and meaningful data.
  • How to compare, assess and select fund managers across the various asset classes.
  • Deciding on whether you should invest in a particular asset class via a lower-cost index fund or determining if an active fund manager is ‘good value’.
  • Blending investments appropriately to achieve ‘extraordinary’ returns.
  • Managing your investments through time towards your specific goals.
  • Managing your emotions and biases.

 

These are some of the tasks Seneca’s investment team and advisers do each day for our valued clients.

Our range of Separately Managed Accounts (SMA’s) ensures all clients are invested in line with our latest research and views on each asset class – with our Investment Committee meeting monthly to discuss those views and make changes as required.

If you’d like to learn what funds we are currently using and why, book a 30-minute appointment with Seneca’s CEO Luke Laretive using the link below.

GENERAL ADVICE WARNING

This report was originally written in January 2024, with some data updated in July 2024. By the time you read it, some of the data points, or our views may not be entirely accurate. You can call or email us for our latest views and opinions.

This investment report was written by Luke Laretive, founder of Seneca Financial Solutions. Seneca holds an Australian Financial Service License (AFSL No. 492686) and is regulated by the Australian Securities and Investments Committee (ASIC). The information contained in this email is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Luke Laretive, Seneca Financial Solutions, its Directors and its associated entities may have or had interests in the investments mentioned. Although every effort has been made to verify the accuracy of the information contained in this email, all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this email or any loss or damage suffered by any person directly or indirectly through relying on this information. Data has been provided by Factset, FEAnalytics, Lonsec, IRESS and curated by Seneca.

Applications for any products mentioned can only be made on the form in the current Product Disclosure Statement (PDS). The PDS can be obtained by contacting Seneca. Potential investors should consider the PDS before deciding whether to invest, or continue to invest in the product. It is advisable that you obtain professional independent financial, legal and taxation advice before making any financial investment decision. Seneca does not guarantee the repayment of capital, the payment of income, or the performance of its investments.