3 New Financial Year Questions for Your Portfolio

The end of the financial year is a time when many investors take the opportunity to review and assess their portfolios. What’s more, many set about attempting to make some positive adjustments for the financial year ahead.

During this period, based upon the interaction we have with investors and their advisers, we think there are three key questions you may want to ask yourself about your own portfolio. 

Question 1: Do I have a sufficient allocation to fixed income?

Fixed Income has long been acknowledged as a core building block of a balanced portfolio –  providing defensive characteristics and diversification benefits to investors. Fixed income, through both floating and fixed rates bonds, generally provides regular, relatively reliable income. In addition, Australian investment grade fixed income investments have generally exhibited low or even negative correlation to other major asset classes, particularly when investors have needed it the most. In times of uncertainty, a “flight to quality” has generally resulted in a surge in demand for the relative “safety” of bonds when other asset classes are experiencing stress.

Despite this, evidence suggests that a large proportion of Australian investors are structurally underweight fixed income as an asset allocation, particularly in superannuation structures. Here are some stats to prove it:

The average Australian superannuation fund’s allocation to fixed income is just 10% vs 40% for the OECD average

The average Australian superannuation fund’s allocation to fixed income is less than half the allocation of equivalent US investors (10% vs. 20%)[1]

The structural underweight in Fixed Income allocations amongst Australian investors may be due to a lack of understanding and awareness of the asset class and, until more recently, difficulty accessing it.

The availability of an increasing range of fixed income ETFs is now transforming access to bond markets, which have traditionally traded ‘over-the-counter’. Investors can now get access to the asset class through the low cost, diversified exposure that ETFs have been providing for equities for many years. In fact, fixed income is the fastest growing ETF segment in the United States – quadrupling in assets under management since 2008.

As the bull market matures, and with some investors questioning equities valuations, it may be prudent, as we start the new financial year, to consider your relative allocations to fixed income vs. equities.

Question 2: Is my equities portfolio positioned for tomorrow?

One of the key trends amongst investors is a growing appreciation of the distinction between the old manufacturing-based economy and the new digital economy. ETFs are fast becoming the go-to tool for Australian investors seeking diversified exposure to new global economic trends that may otherwise be underrepresented on the Australian sharemarket.

One of the well-known idiosyncrasies of Australian investors is a distinct home bias. By nature of the construction of the Australian benchmark index and also the high dividend yields historically paid by our largest listed companies, many of these investors have found themselves with significant positions in a small number of companies. These companies also often operate in the same market sector and therefore have similar macroeconomic drivers. As a result of such concentration, relative to investments in other global markets, investing in these stocks doesn’t give you much diversification.

On the other side of the coin, particularly with respect to mature large cap companies, the Australian market is distinctly sparse in terms of information technology and consumer companies operating in what is broadly referred to as the ‘new economy’ –  an internet and network-based economy driven by data.

The major digital platform technology companies like Google, Facebook, and Amazon, for example, control large amounts of data information, hold dominant market positions and are arguably particularly well positioned to capture the growth in commerce as the world becomes increasingly digitalised. For example:

Just 1% of smartphones use an operating system that isn’t iOS or Android – made by Apple and Google.

Amazon captures almost half of all e-commerce spending in the US, with their global share rapidly expanding.

Google and Facebook collectively account for almost 60% of the revenue growth in U.S. digital advertising in 2017.[3]

Meanwhile, these technology giants’ revenue streams are also growing and diversifying as they identify and develop other uses for the data they collect.  Apple’s latest earnings report highlighted this shift in revenue, as services revenue jumped 30% YoY for the March quarter. Services revenue, which includes revenue from Cloud services, Apple Pay, and iTunes, provides a high-margin and more consistent income stream outside of iPhone sales. Representatives of Google’s YouTube video service said people watch over 150 million hours of its footage on TVs each day. And Facebook’s acquisitions of Instagram and WhatsApp has solidified its social media monopoly. Facebook itself has transformed from a social network to effectively become the world’s leading media company – with their News Feed now serving as the front page of the newspaper for most of their user base. This wasn’t an accidental phenomenon – Facebook’s data based algorithms allow it to customise user news feeds to present them with stories and other media that they are most likely to engage with.

Question 3: Am I getting the most out of my cash?

Many investors often don’t take the time to fully consider their options when it comes to the cash portion of their superannuation or investment portfolios. Simply choosing the “default option” when it comes to the decision of where to best park cash on investment platforms could be a missed opportunity. Cash invested in linked CMAs are often earning rates that are far lower than other alternatives, with some default cash accounts currently earning less than 0.3% p.a. for investors.

So there you have it – 3 questions for the new financial year. Hopefully they got you thinking – happy new (financial) year)!


[1] Source: Deloitte

[2] As at 31 May 2018. Yield will vary and may be lower at time of investment.

[3] Source: (VIEW LINK)

Ilan Israelstam
Co-Founder, Head of Strategy & Marketing

Ilan was a founding team member of BetaShares and is responsible for corporate & product strategy. Previously, Ilan worked for The Boston Consulting Group (BCG), one of the leading global strategy consulting firms.

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