Defending your wealth

Giselle Roux knows that sometimes you have to break a few eggs to make an omelette.

As the chief investment officer for Escala Partners she spends a lot of time studying the asset allocations of private client holdings in search of improvements.

Sometimes this requires challenging long-held views of extremely successful and wealthy people in order to help them attain a robust portfolio that outperforms.

"There are always going to be certain asset classes that investors have decided not to participate in for whatever reason. But you should know the role and risks borne by every asset in your portfolio," she says.

The following multi-asset portfolio is based on the popular 60:30 balanced fund but with one important caveat: there is no direct allocation to property. "My view is you need to have a fairly large investable pool of money to participate directly in property without taking undue risk." she says.

Roux believes that among other things, the relative illiquidity, combined with the uncertainty of returns, forces her hand when it comes to making allocations to property.

"If I described an asset that produced gross yield, before costs, of 4 per cent, possible capital gain of another 4 per cent and required a three-month sale process, most would be reluctant to allocate any more than 10 per cent," she says.

The portfolio we've presented would be appropriate for the "average investor", which means 99 per cent of readers will need to dial components up or down in order to better reflect personal circumstances.

But don't assume that just because you are retiring that you need to sell down you equity holdings. Australians are retiring at the same age but living longer, creating a mismatch in liabilities.

"The vast majority of people will run out of money if they do not allow for capital growth until they are 70 or thereabouts," she says. When it comes to equity strategy, Roux offers some useful and practical advice. Spend more time on mid-caps, make your offshore exposure meaningful and keep your portfolio focused.

"I think people should look to the mid-caps. This is typically where companies such as, Ramsay Health Care and Flight Centre come from," she says.

"They are no longer high-risk companies," she says. "The big hitters in your portfolio tend to come from this space." not that you should limit your endeavours to the ASX. Australian investors have typically eschewed international equity exposure because of currency risk and a lack of familiarity with international blue chips.

Roux argues that investors who make these types of excuses are selling themselves short. They should be looking for the best possible companies at the best possible price.

"The minimum allocation to international equities should be 10 per cent of the total portfolio if it is going to make any difference. I would make the case that there is no reason why half your total equity exposure shouldn't be domestic equity and the other half international equity." she does, however, recommend a tilt toward holding income-producing equities among your domestic holdings. "Franking is a bit of a free lunch. You can't get that elsewhere. You might as well hold your income-producing equities predominantly in Australia."

In terms of your fixed-interest allocation, Roux recommends an even split between cash, investment-grade bonds such as government and corporate credit, and higher-yield instruments like ASX-listed bonds and hybrids.

As for the age-old question of whether hybrids should really be classified as part of your "fixed income" allocation at all, she offers a novel solution: split them between your growth and defensive allocations (not the 10 per cent marked "other").

"Hybrids sit in that grey area. They straddle both growth and defensive assets," she says. "Really, it depends on the security."

Article in Smart Investor