Diversified Income Portfolio - Adjustment April 2018

The objective of the Diversified Income Portfolio is to deliver returns greater than the RBA cash rate 1% over a two-year rolling period by investing in a diverse mix of asset classes. At the time of writing, this implies an annualised return objective of around 2.50%.

We achieve this by constructing a portfolio with a ‘moderate’ risk profile. That is, one with a greater allocation toward bonds and cash as opposed to equities. This allows for a stable income flow with a lower volatility (risk) profile than a pure equity or growth focused fund.

While also aiming to keep costs lows, we constantly scan the market for new securities that allow us to achieve our performance objectives at a lower cost than our peers.

The changes

Bonds

We are selling the relatively expensive Macquarie Income Opportunities Fund (MAQ0277AU) and reinvesting across two recently listed securities for our bond exposure, the VanEck Vectors Australian Floating Rate ETF (ASX: FLOT) & Vanguard Global Aggregate Bond ETF (Hedged) (ASX: VBND). FLOT is comprised of a range of floating rate bonds domestically and abroad while VBND is comprised of a range of international fixed rate bonds.

Equities

To diversify our equity exposure, we will be splitting it equally between domestic and international equities. To achieve this, we will introduce the Vanguard MSCI Index International Shares ETF (ASX: VGS). This ETF is designed to track the MSCI World ex Australia index, providing large and mid-cap equity exposure to 22 developed market countries.

The outcomes

1. Greater alignment of asset classes to the standard benchmark
2. A slight increase in our weighting to bonds from 59% to 66%
3. A drop in the portfolios indirect cost ratio from 25bp to 19bp