Asset Class Investing is like Car Shopping

What is your primary consideration when shopping for a car?

If I could indulge in my fantasy world where money was no object, I would own my dream car, the Lamborghini Huracan LP610-4 Coupe that starts in excess of $400,000 for the base model. From the options menu, I’d pick the Nero Nemesis matte black exterior colour, sport exhaust system, Lamborghini Dynamic Steering (LDS), full electric adjustable heated seats, “Sportivo” bicolour with smooth leather interior, 20” high gloss black Rims Giano rims and magneto-rheological suspension. I would be hard-pressed to say no to such a sleek, futuristic-looking engineering masterpiece that clocks a mean 3.2 seconds going from 0-100 km/h and owns a top speed of 325 km/h.

The reality is while the acceleration could come in handy from time to time, I’d probably never experience its top speed. I’ve driven without dynamic steering, coped with a regular exhaust system on 16” rims, and survived eight Perth winters on non-heated cloth seats just fine. All I need is a car with proven service history, and the basic functionality of getting me from point A to point B. Do I want a Lamborghini Huracan? Absolutely. Do I need one? Most probably not.

At Alman Partners, we recognise the parallels of choosing a car with asset class investing.

Firstly, the most important issue for clients typically relates to financial goal achievement. This means going from a position where goals are unfunded, to one where they are. In my car analogy, it is understanding that the end game is to get from point A to point B. Keeping the focus on the target destination means not getting caught up in the little things along the way, such as that driver who changed lanes without signalling.

Second, the investment tools at your disposal are plentiful. Just like the Lamborghini options menu, today’s investment universe is replete with options: direct securities, constrained funds, unconstrained funds, long-short funds, absolute return funds, hedge funds, private equity funds, and high yield funds, to name a few. Most will sound exciting, look exciting, and even feel exciting for the investor. The one common denominator they share is a higher cost that often isn’t justified by the return benefit you receive1.

An evidence-based approach focusing on goal-achievement is like a Toyota – a car renowned around the world for its reliability, build quality and outstanding value. Sure, a Toyota may not be the flashiest car on the road, but is one reliably able to get you where you want to go. Even when you are driving a supercar, you are still at the mercy of the weather, traffic lights, other road-users and even highway patrol if you have a need for speed! There’s no guarantee you’ll get to your destination any faster, in fact, it actually increases the risks you face and may decrease your chances of a successful journey.

If, like so many others, getting from point A to point B reliably and safely is your ultimate investment objective, more often than not, the asset class approach is what you’ll need.

1As at 30 June 2016, S&P Dow Jones Indices reported that 69.18% of Australian Equity (General) managers underperformed benchmark and 91.89% of International Equity (General) managers underperformed benchmark over five years.

Contributed by friend of Alman Partners, David Andrew of Capital Partners.

Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly. 

 

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