As part of our processes of trying to quantify the value our investment advice adds to our clients’ portfolios we use two main methods. The first is a peer comparison comparing our clients’ returns against their peers who either use other advisors or are self advised. On average Amicus’ clients out-perform peers by around 20bps in annual returns.
One limitation of this method is that it does not adjust for the risk taken to achieve these returns (either by Amicus or non-Amicus clients). For example, some investors may have invested heavily in fixed rate investments and enjoyed an interest rate rally, or invested heavily in smaller unrated ADIs that did not defaul; while others invested solely in highly rated assets on a floating rate basis. The latter group of investors may have achieved a lower return, but took less risk and so a direct comparison is not simple.
To overcome this limitation, Amicus also tracks a model portfolio based on a theoretical client making an investment each month in line with Amicus’ recommendations at the time. This gives a far more detailed analysis of the risks taken to achieve the returns as the exact portfolio is known. The Amicus model portfolio is conservative in nature and restricts itself to predominantly investing in Term Deposits and Floating Rate Notes, but also with small investments made in 11am accounts (for daily cash), the TCorp cash fund (as a proxy for cash funds available to most of our clients) and notice saver accounts.
The return results relative to 3 month BBSW and the Bloomberg Bank Bill Index are shown below. As can be seen there is consistent out-performance of these benchmarks with far less volatility of returns:
Also of note, the Amicus model portfolio has outperformed a strategy of simply looking for the best 3 month Term Deposit rate in the market and rolling a portfolio of Term Deposits by an average of 31bps over the last 5 years. This means an additional return of $310,000 per annum has been generated on our average client holdings of around $100 million over what is a typical default strategy for conservative investors, particularly those without advisors. This level of additional return in margin fully justifies the cost of advice for any client with a portfolio in excess of $20 million (expected additional return around $62,000 per annum) so long as the risks taken are the same or less which we examine below.
Assessing the risks taken to achieve these returns we summarise these below based on the model portfolio as at August 2019:
Credit Risk: All investments are rated at investment grade, with the lowest categories being BBB- (3%), BBB (13%) and BBB+ (20%). While not strictly conforming to criteria recommended by TCorp, a number of “BBB” investments are maturing in the next 3 months that would make the portfolio compliant with the TCorp criteria. The Amicus model portfolio would almost certainly be of higher ratings quality than one generated by simply rolling 3 month term deposits at the most attractive rate as the most attractive rate is generally offered by more lowly rated (or unrated) institutions.
Interest Rate Risk: This is relatively minimal as only 10% of the portfolio is in fixed rate term deposits or bonds with maturities greater than 3 months, but would be slightly greater than an alternative of rolling 3 month term deposits.
Liquidity Risk: 4.5% of the portfolio is in at call cash accounts with a further 2% in a notice saver account that can be accessed with 31 days’ notice. A further 20% of the portfolio has maturity dates within the next 3 months and 65% of the portfolio is in FRNs which can be sold and cash realised at 2 days’ notice. Because many of these FRNs have been purchased in prior years they are trading at a premium to par because of the “roll down” effect of credit margins contracting as maturity shortens meaning they can be sold at a profit if liquidity is needed. Not only does this strategy provide far greater liquidity than a default one of re-investing term deposits so one matures each week, it also provides higher returns for less credit risk.
Maturity Risk/Reinvestment Risk: These risks are opposite sides of the same coin as risk of loss increases with time to maturity, but also re-investment risk decreases (meaning a lower proportion of the portfolio matures each month decreasing the risk that when re-invested yields currently available do not match those available at the time of the investment). The average maturity of investments within the portfolio is 19 months meaning the portfolio has far less re-investment risk than a rolling portfolio of 3 month term deposits (average term to maturity of 1.5 months).
Concentration Risk (Diversification): This is the risk any one entity unexpectedly defaults causing a loss in the portfolio and is managed by spreading (diversifying) investments across a number of entities and maintaining maximum concentration limits for individual entities depending on risk. The portfolio is well diversified with the largest concentrations being in major banks (12% exposure to each of CBA, NAB and Westpac) with risk spread across 22 separate ADIs (plus TCorp). No entity rated BBB+ or below comprises more than 5% of the portfolio, with most entities in this ratings bracket having concentrations just above 2% (meaning that in the unlikely event of a default any capital loss incurred will be more than offset by interest income so overall portfolio capital is preserved). As compared with a strategy of rolling 3 month term deposits, this is likely to offer far better diversification as typically ADIs run “specials” for a month or longer, so if the best rate was always selected, concentrations up to a third of the portfolio in one institution is not uncommon.
Any investor wishing to learn more about the Amicus model portfolio and how Amicus manages risks in a conservative manner to add returns many multiples of our fees should feel free to contact us.
