How to invest a lotto windfall

PORTFOLIO POINT: They're suddenly $17 million richer, so what should the lottery winners do now?

You might think that the three punters who shared in last night’s lottery jackpot of $51 million may never have to make another difficult decision. But the reality is that those lucky ticket holders are now facing an extremely tough assignment with around $17 million to invest in a volatile market.

Invested properly, $17 million should throw off around $1 million a year in dividends and distributions (that’s around 6%). Invested poorly it could disappear as quickly as it arrived.

Eureka Report spoke to wealth management experts about what steps the winners should take ... and where they should invest for the best mix of capital growth and income.

The head of investment strategy at UBS, George Boubouras, says the first rule is that “every portfolio is bespoke”. The point he makes is a good one. Portfolio construction at this or any other level is not simply an off-the-shelf solution. The design needs to incorporate your age, family needs, liquidity requirements and long-term goals.

Cash

Every investor needs a significant exposure to cash. Conservative investors might like cash for its predictable returns, but even free thinkers need some money on hand to take advantage of opportunities as they arise.

Generally speaking, classic asset allocation theory has investors putting anywhere between 10% and 20% of their capital in cash. But in the case of our winners, their focus may be wealth preservation.

There are significant risks in being "fully invested" from day one in any market, especially a market as precarious as the ASX is at present. Boubouras says: “You don’t take any risks with your cash. You don’t take any credit risk and definitely don’t invest in things that are not investment-grade.”

Fixed income

When you have $17 million to invest you’ll find a lot previously closed doors swinging wide open. One of those will be the corporate debt market, where investors need to part with around $500,000 per parcel.

Boubouras recommends a combination of Australian government, semi-government and investment-grade corporate bonds, such as Woolworths, Amcor, Wesfarmers and Woodside, to add certainty of income to the portfolio.

It is also worth noting the recommendation of Mercer, who suggest that investors consider a blend of fixed income investments sourced from both here and overseas.

Investors with a lot less than $17 million in the bank could also consider this advice. The well-established international debt markets represent a good opportunity to diversify away from the Australian dollar and the parcel prices are generally many times smaller.

Equities

A selection of blue-chip shares is a must for anyone looking to build a legacy for future generations and our fortunate friends are no exception.

Fabiola Gibson, a private client adviser with Morgan Stanley Smith Barney, recommends direct shareholdings in stocks “with strong business models and cash flows, high barriers to entry and good management, such as BHP, Wesfarmers and WBC”.

Other advisers are quick to point out the capital growth opportunities available at the smaller end of the market, and the benefits of international diversification.

Glenn Fairbairn, a private client adviser with Hewison Private Wealth, notes that at current prices many high quality stocks represent good income plays. “It’s a bit of a misnomer that shares don’t provide high levels of income,” he says. “Because shares are undervalued at the moment, a lot of the company dividend rates are quite strong.”

Citigroup equities strategist Richard Schellbach agrees, noting the group's forecast for solid capital growth over the next three years as well as a dividend yield of over 5% for the market, which is on par with the cash rate. In terms of sectors, Schellbach is also quick to suggest resource stocks, which he believes are well placed to take advantage of the corporate earnings recovery story.

Other favoured sectors include transport, which offers “good operating leverage, with exposure to the relative strength in the domestic economy: the sort of sectors you want to be in during an economic recovery”.

Property

In terms of growth assets, property is just as important as shares but generally more stable and has the advantage of taking care of one of the most basic of human needs: shelter. How it fits into a portfolio is up to the individual. Recommendations can vary from as little as 5% to as much as 30%.

Investing in property doesn’t just mean dropping a bundle on a luxury pile in Mosman or Toorak. Hewison’s Glenn Fairbairn notes that our lottery winners should now have the opportunity to invest directly into commercial or residential property if they wish.

However, it’s important they don't get overzealous. The relative illiquidity of this asset class means its important not to have too much tied up in bricks and mortar.

Alternatives

With such a large sum to invest, it's important to be open-minded to the benefits of alternatives such as hedge funds and private equity vehicles. This asset class isn’t for everyone, says Boubouras, but can yield returns of up to 15% to those willing to park funds away for longer periods.

“Sovereign funds and institutional fund managers do this every day,” he says. “And here’s the key: if you don’t invest in growth assets, then you’re going backwards in real terms, because investments have to factor in inflation through a cycle.”

Mercer’s Caroline Douglass advises caution and suggests that the winners “not get too involved in financial engineering” before they have attained a degree of sophistication.

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Considering all of the above can take some time, and the excitement of winning can tend to distort the priorities of even the most reasonable individual. For this reason we found the wisdom of Matt Browning, of the Myer Family Office, to be among the most illuminating.

Browning warns that people who come into wealth suddenly are prone to impulse buying (matching Lamborghinis anyone?). Browning advises locking the winnings away for a good six months before making any big decisions. Putting the $17 million (or least most of it) into a fixed term deposit will give the winner the necessary breathing space '¦ and a handy half-million in interest.

As Browning says, this enforced downtime is the perfect opportunity to consider “family objectives, estate planning, asset protection – all the things that need to be taken into account before deciding on an appropriate course of action.”