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
- Greater alignment of asset classes to the standard benchmark
- A slight increase in our weighting to bonds from 59% to 66%
- A drop in the portfolios indirect cost ratio from 25bp to 19bp
Frequently Asked Questions about this Article…
The main objective of the Diversified Income Portfolio is to deliver returns greater than the RBA cash rate plus 1% over a two-year rolling period by investing in a diverse mix of asset classes. This aims for an annualised return of around 2.50%.
The portfolio manages risk by maintaining a 'moderate' risk profile, which involves a greater allocation toward bonds and cash rather than equities. This approach provides a stable income flow with lower volatility compared to a pure equity or growth-focused fund.
Recent changes to the bond allocation include selling the Macquarie Income Opportunities Fund and reinvesting in the VanEck Vectors Australian Floating Rate ETF and Vanguard Global Aggregate Bond ETF. These changes aim to enhance bond exposure with a mix of domestic and international bonds.
The equity exposure is diversified by splitting it equally between domestic and international equities. This is achieved by introducing the Vanguard MSCI Index International Shares ETF, which tracks the MSCI World ex Australia index, providing exposure to 22 developed market countries.
The expected outcomes of the recent portfolio adjustments include a greater alignment of asset classes to the standard benchmark, an increase in bond weighting from 59% to 66%, and a reduction in the portfolio's indirect cost ratio from 25 basis points to 19 basis points.
The Macquarie Income Opportunities Fund was sold because it was relatively expensive. The portfolio aims to achieve performance objectives at a lower cost, so reinvesting in more cost-effective securities was a strategic decision.
Using ETFs in the Diversified Income Portfolio provides cost-effective exposure to a broad range of asset classes. ETFs like the VanEck Vectors Australian Floating Rate ETF and Vanguard Global Aggregate Bond ETF offer diversified bond exposure, while the Vanguard MSCI Index International Shares ETF offers international equity exposure.
The portfolio aims to keep costs low by constantly scanning the market for new securities that allow it to achieve performance objectives at a lower cost than peers. This includes strategic adjustments like selling expensive funds and reinvesting in cost-effective ETFs.
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