Australian wealth hits record high, but investors need to protect it better


Simon Shields

Australian household net worth climbed to new record in the December quarter of 2016, almost hitting $10 trillion, but investors need to protect this wealth through a better management of investment risks, says leading outcomes based equity manager Monash Investors.

Australians now hold a record amount of their wealth in property, with $6.1 trillion of household net worth held in residential land and houses in the December 2016 quarter, against total net worth of $9.4 trillion, according to new figures released by the Australian Bureau of Statistics. Another $4.7 trillion was invested in financial assets, including a record $1 trillion in cash deposits, $2.6 trillion in superannuation and $798 billion in shares.

Simon Shields, co-portfolio manager at Monash Investors, said with such a huge amount of household wealth invested in shares and property, Australians are very exposed to share and property market movements.

“Investors need to proactively protect this near $10 trillion in household net wealth and prioritise their financial goals. Whether it’s losing their money or being overexposed to share or property markets, Australian investors are now much more aware of their desired financial outcomes, and they are articulating them loudly and clearly.

“Investors are going to independent financial advisers (IFAs) and telling them exactly what they want – and clearly stipulating what they don’t want. For most Australians, risk is about losing money. Preserving their wealth has therefore become a key investment outcome,” said Shields, who co-manages Monash Investors’ flagship Absolute Return Australian Equity Fund.

“Most investors are not simply interested in achieving ‘relative returns’ against stock market indexes or against composite benchmarks in the case of balanced funds, in which a huge amount of household wealth in invested. Such esoteric targets have no meaning for people,” said Shields.

“In contrast, outcomes-based investing is becoming more popular because it is about creating wealth and achieving a positive absolute return for investors whether equity markets are rising or falling,” said Shields.

“Importantly, outcomes-based investing means fund managers do not hold stocks just because they form a key component of a benchmark index. We only hold stocks when they offer a considerable amount of upside (long) or downside (short).

“This contrasts with mainstream managers who will often own stocks that are not performing well because they do not wish to deviate too far from the index. So, traditional equity manager often own banks and resources because they are so broadly represented in the benchmark index, regardless of the cycle or valuations,” said Shields.

“With this view, if the index they are tracking falls by 25 per cent and the manager falls by only 20 per cent, they would consider that they have done a very good job for their investors. But we beg to differ, as would most investors, who want to keep their household wealth intact.

“As the numbers highlight, there is too much at stake to leave the management of wealth to the vagaries of the market. More certainty, through outcomes based investing, will allow people to sleep better at night knowing that the wealth they worked so hard to accumulate is kept intact,” said Shields. “That’s why we manage people’s money to avoid the loss of money measured over a full investment cycle. We have no arbitrary objectives.”

IFAs have welcomed the goals-based advice approach – so much so that a new association has been launched called the Association of Goals Based Advice to help IFAs transition their businesses to align with this movement.

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