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24.12.2015

Giselle Roux: it pays to be cynical about investments

Where should investors be looking for out-performance over the next year?

Investment returns over the coming year are likely to continue to reflect the tough pace of the second half of 2015. However, there are always themes that can provide upside, such as the depreciation of the Australian dollar adding to global equity returns. This impact is likely to fade through 2016 and there is the prospect for the US dollar to be a little weaker in the first half of the year. In turn, it provides a better setting for emerging markets, which have underperformed in recent times and where most investors still have a low allocation. Within this diverse designation, there are countries and stocks to avoid and active funds offer the best option. 

What opportunities are there in key macro events over 2016?

It's hard to conjure up a positive story on economic growth. There are, however, some trends that are likely to persist – such as changing consumption patterns in most sectors and demographics that can open up potential investments. On the data side, even a small rise of inflation, specifically in the US, could prove to be a trigger for a change in asset returns through 2016.

Are Australian investors diversified enough?

The concept of a diversified portfolio is to have sources of investment returns that are unrelated to each other. It is not a numbers game – rather, it should be about different parts of the capital structure of an asset, or differentiated rationale for performance, such as interest rate sensitivity, for example. Many investors get caught in the emotion of buying into investments when they are showing their best returns, or are sold product by the promoters rather than considering whether it suits their portfolio. Another common problem is the over-emphasis on factors such as franking, whereas there have been great stocks with low yields or unfranked dividends. It reflects the adage "too much of a good thing".

Has asset allocation changed since the GFC, and how do investors need to get up to speed?

The financial crisis has had two major repercussions. Investors tend to hold more cash than before – arguably not a bad idea, though there have been better ways to reduce risks – and most missed out on fixed-income capital gains as interest rates fell. With that cycle behind us, it is now harder to find alternatives to cash. On the other hand, it did trigger a better balance between Australian and global equities.

Most investors would benefit from a better understanding of the character of the investment proposition. What exactly will determine the return, what is the likely volatility or variance in returns, how much ongoing information will be provided, are the fees reasonable, is there liquidity in the product?

What has been your best investment?

The best investment is not always the one that makes the highest return. Holding a large amount of cash into 2008 and deploying a good proportion of that into fixed income in the subsequent years meant that the financial crisis had relatively little impact on our financial wellbeing. The mistake some make is, for example, to cite their house as a great investment. That may simply be because of time frame – we have owned our home for more than 20 years and naturally it has increased substantially in value. However, the annual returns, as well as taking into account all the costs associated with property, mean that the net return is much lower.

What has been your worst investment?

Loss-makers that linger in a portfolio without a clear reason on the hope that they might get better are always the poor investments. They tend to prey on one's mind and distract from decision-making. Almost always there are other options where one has much greater confidence in the outcome. In practical terms, the worst outcome for me was Citigroup shares from the employee scheme that fell like a stone in the financial crisis. I had given them little thought and paid the price. Always ask, "do I understand why I am holding this investment?"

What key lessons have you learned about markets and the economy over your years of experience?

There must be logic to an investment and ensuring the argument is coherent goes a long way to getting a reality check on the potential returns. There are literally thousands of investment opportunities out there, and therefore one should expect to turn down most. They might have a weak investment case or simply not suit one's requirements. The financial world actively markets its product suite inevitably emphasising the promise of upside. It pays to be somewhat cynical. 

What do you do to relax?

I've always run. I started running at school. It's part of what I do – it recharges me. What I like most is to run at the end of the day – it breaks the cycle. If it takes you 40 minutes to get home [on public transport or by car] and 45 to run, why not run? I tune out completely – I've run past my own family and not even acknowledged them. I don't see people when I run. I listen to podcasts, mostly curated by my sons [Nicholas, 24, Scott, 22, and Jeremy, 20].  In Our Time, This American Life, Radiolab, The Moth, The Allusionist and Meet the Composer. The mix of things you can listen to is so fantastic.

[Husband] Michael and I did a lot of hiking before kids. After kids, we camped and the boys really enjoyed the bush. We did lots of big driving/camping trips when they were younger and now that they're adults, if they want to come along when we hike, we're very happy. Earlier in the year we did one in the Great Otway National Park and recently we did sections – probably about 150km all up – of the Great South West Walk. It's a little bit of a hidden secret – one day we walked through the forest and we didn't see another person. There's something spiritual about being outdoors in a natural environment and it's just you walking along. You can really tune out all the business of life. The more you're out there, the more you're enfolded in nature. The more I see, the more I feel the natural environment.

The other thing we do a lot is go to concerts – the Melbourne Symphony Orchestra and the opera occasionally. Mostly Michael and I, and sometimes with one of our sons.

Source: AFR

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