Polson Higgs
Autumn Update
Investing Core Wealth Is Like Running A Marathon
The Polson Higgs Wealth Management team, 30 April 2010
Welcome to our Autumn Update
In this edition of our Update we review returns for the past three months to 31 March 2010 but first we discuss how investing is like marathon running.
Marathon anybody?
The analogy of the marathon runner is useful when it comes to investing core wealth.
Most marathons include several notorious uphill stretches where the endurance and stamina of athletes is pushed to the limit. Investors felt the same all through 2008 and into 2009.
But the marathon isn’t all like that. There are also the gentle, downward slopes where effortless gains can be made – just as we have experienced in the past 12 months (see the tables of extraordinary return over the page).
In a marathon there is no way to avoid the occasional hard, uphill sections. That is also true for investment. We have had two serious uphill sections in the last 10 years which is enough to test even the most hardened of marathon runners.
Running a marathon, let alone winning one, is a test of preparation, mental attitude and discipline - all the attributes that are required of serious investors.
‘Preparation’ is about planning with the help of a good coach. The coach’s job is to explain the theory and practice and to help organise the training regime.
‘Mental attitude’ is about lots of things but it includes resilience, the ability to bounce back from adversity.
‘Discipline’ is about sticking to the plan, seeing it through and not getting distracted.
With investing we can describe a similar sequence of attributes: ‘preparation’ is about employing the right wealth management coach, being well-briefed and documenting your decisions in a wealth management plan; ‘mental attitude’ is about accepting that investments go down as well as up; and ‘discipline’ is about keeping in touch with your wealth management coach, not getting distracted by the ‘noise’ in the media and seeing the plan through.
It is no different for us as wealth management coaches, just we are assisting in the process.
How did portfolios perform to 31 March 2010?
We have had a superb recovery in share markets over the past year. All but one of our share sub-sectors have performed well in excess of their underlying benchmarks against which we compare our performance.
How can we beat a benchmark when we are passive investors who don’t take any risks betting on individual companies, industrial sectors or countries?
The answer is that, although we are passive, we don’t create portfolios that just match an index; we have a number of ‘selection filters’ and simple rules that restrict the companies that we can invest in and those filters and rules have allowed us to add considerable value over and above the index.
Then we have our tilts to smaller companies and value companies and these have out-performed large and growth companies over the past year. In the tables below see the extra return added by our investment philosophy and simple selection strategies over the past year.
Sub-Investment Class Extra Return for Year to 31 March 20101
This is an extraordinary 12 months for our value and small sectors strategy and it is unlikely to get much better than this. Don’t forget there are periods when it is the other way around - large companies out-perform small companies and value companies. Remember too that these returns are before tax and any costs so they don’t all flow through to you as returns. We keep this sort of table free of tax and costs to be able to compare with an index on like-for-like basis.
Overall, after investment management costs, our portfolios have had a very good year with returns ranging from 21% to 35%, before issuer and advice costs, and after the inclusion of the defensive sectors. Even the five year returns are starting to look respectable as the effects of the crisis abate.
PHWM Portfolio Returns to 31 March 20102
These portfolios include the standard allocation to New Zealand cash, fixed interest and shares and the Plan B international pools. In this respect the mixes assumed below may differ from your portfolio. For 3 & 5 years returns are per annum.
How have recent events affected portfolios?
For the first three weeks since 31 March 2010 share markets have put on another growth spurt up between 2% and 4%.
In the past week we have had the debt problems of Greece and Spain come back to worry us and markets are back a percent or so. We have had the International Monetary Fund proclaim that the Global Financial Crisis is ‘officially’ over although the lingering effects will be felt for many years. The good side of the Global Financial Crisis is that inefficiency, fat and excesses of all kinds become exposed and the markets and regulators get the chance to deal with them.
1. Before tax, investment costs, issuer and advice fees.
2. After investment management costs but before Adviser fees and the Issuer/Administration fee which vary according to portfolio size. This table goes back to the inception of Plan B portfolios in New Zealand, 20 May 2005. PHWM didn’t begin using Plan B portfolios until October 2007.
Please don’t hesitate to give any of the team a call to discuss these or any other matters.
Polson Higgs Wealth Management Limited's disclosure document (116KB, Adobe PDF).
<< Back to May 2010 News Archive
Last updated: 4th May 2010 | 8:36 am
