Investing in “alternatives”
My employer's default super fund allocates 21-23% of their growth, diversified and balanced accounts to "alternatives" with an allocation to both growth and defensive alternatives.
What are these alternative assets, how important are they to a successful portfolio allocation strategy and how can an SMSF effectively access this asset class?
Bruce Brammall’s response: “Alternatives” can be pretty much anything that doesn’t fit neatly into the traditional asset classes of cash, fixed interest, property and shares. Plus, in many cases, assets that fit into those asset classes, but are being invested differently, or with a twist, to regular investments.
For example, the first part of my answer could include commodities (including gold and silver), currencies, wine, films and art amongst others.
The second part could be hedge funds, derivatives, private equity arrangements and venture capital that are investing, potentially, in listed companies but with mandates that allow them to go much, much wider.
SMSFs can invest in most if not all of those asset classes, but they are highly specialised and often carry risks outside (higher and lower) the traditional four asset classes.
It’s an area that requires expert knowledge in some cases, or just making the time to investigate thoroughly your available options in other cases. It is a difficult asset class to buy a single fund that will cover you across “all alternatives”. It will generally mean that you will need to either buy them directly, or to buy a multitude of managed funds that touch on different parts of the alternative sphere.
It is most certainly a case of doing some research into these areas, as it is very, very broad. Make sure you’re diversified and make sure you’re not chasing it as an asset class that is performing well, as it’s just as likely to be cyclical as any other asset class.
Turning to managed funds
I love this publication and have been a member for a number of years. I follow your stock recommendations and have also subscribed to Clime. As you would be aware not all recommendations are winners for whatever reason, and I seem to pick the duds most of the time. I assume that this is because I am not 'professional' enough to undertake the extra research required.
I also find that I do not have the knowledge or back-up research to know when to hold or dump recommended stocks in a timely fashion. I am now coming to the conclusion that I may have to turn to managed funds, even though these may be somewhat expensive as they take a performance fee for simply exceeding the market. I am sure that there are a lot of members out there who would fall into the same category as me. I am wondering whether any Eureka Report columnists can give their opinion on this strategy. This, hopefully, can be followed up with an article about well-managed funds that covers local stock as well as international and area specific such as Europe, Asia etc. Of course if there are any other types of investments similar to this strategy these could also be covered.
Brendon Lau’s response: I can understand your frustration as picking stocks is not easy to do, particularly if you are looking for shorter-term performance. Often the stocks we pick do require some time to “bloom” and we usually take a one- to-two-year view on them. Another thing worth considering is whether you have enough diversification in your portfolio. Trying to pick a small number of stocks in the hope of getting strong returns is a “high conviction” strategy – meaning you need to really know the stocks and industries inside out. There is not a hard and fast number of stocks to own, as it does depend on an individual’s circumstances, etc. But I typically like to have at least 8-10 small caps in my portfolio to supplement my blue-chip holdings.
You can see the team’s portfolio holdings on the Eureka Report site (click on the “Investment Portfolios” tab at the top of the main page).
Choosing a good fund manager is also a viable alternative, although there are usually higher transaction costs involved. It really boils down to how hands-on you like to be as well.
Testing dividend strategies
Having back-tested the concept of "dividend stripping" (see Dividend washing dries up), and in starting to "dip my toes in the water", I am wondering if you could advise where I could obtain a list of ex-dividend dates and current yields for the ASX 100. I am particularly interested in any stocks which actually go ex-dividend during May, June and July.
Editor’s response: Thanks for your letter. As companies only declare ex-dividend dates in their profit reports when they announce the dividend, there isn’t a comprehensive list for the months you want. However, for the companies in the S&P/ASX 100 index that have declared ex-dividend dates, here is a list:
Bendigo & Adelaide Bank
Bank of Queensland
Insurance Australia Group
National Australia Bank
You can find these individually by going to each company’s website, or in their results. Some websites offer the service as well.
For a list of companies’ yields, I suggest you try StocksInValue. The service, which is a joint venture between Eureka Report and Clime Asset Management, not only has this feature across many of the companies on the ASX, but also allows you to customise your own portfolio and watch lists in a variety of ways.
For more Eureka Report correspondence, click here.