Adam Murchie

Current market dynamics are creating an interesting opportunity set says boutique property fund manager, Forza Capital. Established in 2010 by Adam Murchie and Ashley Wain, Forza Capital has developed into a business known for its savvy investment positions, with investors averaging IRR’s of 29% per annum net of fees based upon exited investments.

A credit squeeze on both residential purchasers and developers has significantly impacted the short-term supply/demand dynamics, but it is unlikely to change the overall long-term market trajectory.

According to director Adam Murchie, the availability of credit for both residential purchasers and residential developers has been seriously curtailed.

“This has seen demand for residential property fall at the same time supply has decreased, as residential developers can no longer get their stock to market.”

“Short term, this is providing a ‘sweet spot’ for purchasers who want to upgrade their residence opportunistically.”

Adam Murchie believes these banking changes are not actually changing demand, rather, they’re simply deferring it.

“Current purchasers who cannot get finance will still want to purchase in the future, however the future residential stock supply pipeline has been squarely curtailed.”

“This will take time to mobilise again and it is going to create a supply bottleneck. Eventually this will see prices increase,” he said.

Co-director Ashley Wain believes this dynamic will worsen affordability; because rental vacancy is very low (see Chart 1), this supply squeeze will eventually put serious upwards pressure on rents (refer Chart 2).”

“Essentially, the affordability crisis is going to be relocated from owners to renters short term,” he said.

“Add in population growth that’s not tapering to the same degree as supply, in future years we are going to see some real pressure on housing supply and demand as evidenced in Charts 3 and 4.”

Forza Capital is known for its ability to find value in turbulent markets and it sees the current market dynamics as presenting some interesting reference points.

“Developers are unable to finance and develop sites and yet we have very strong long-term population growth. In Melbourne alone, we have witnessed an average of 145,000 new residents per annum over the last two years,” said Adam Murchie.

“Looking forward, we see a real need for future supply; over the last 20 years, 53% of this growth has been accommodated on the fringe, however infrastructure constraints will become an impediment to future significant growth on the fringe.”

Ashley Wain believes the ‘middle ring’ will be ‘tapped on the shoulder’ to accommodate the bulk of this growth.

“There are only so many new train lines, hospitals and schools that Governments can build on the fringe; as such, Governments will look to locate people where this infrastructure already exists.

“Large format land holdings in strategic locations with public transport and social amenity nearby will become highly sought after,” he said.

“For Forza Capital, the holy grail is securing income producing, large scale land holdings.

“With time, the investment performance of such sites can often be exponential and generally with reduced risk as you always have a fall-back position – they are very hard to find but are worth the wait”.

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Adam Murchie

Rising land values, population growth and constrained supply of new office accommodation is expected to put upwards pressure on Melbourne office rents in the near future says boutique property fund manager, Forza Capital.

Ashley Wain, co-director of Forza Capital says, “Over the past five-six years, the tightening of capitalisation rates – which have generally tracked bond rates – have helped keep downward pressure on rents.

“This is due to the fact that asset value growth, and not rental value growth, made feasibilities stack up.

“However, with bond yields now trending upwards, higher rents will be needed to justify new development.”

One of the key drivers of the increased cost in delivering new office stock in CBD and surrounding inner city locations has been the growth in land values. For the past 15 years, Melbourne’s new office construction has been driven by major developments in areas such as Docklands and the western end of the CBD, where cheap land values allowed developers to attract major tenants to new buildings at competitive rents.

Over 1,000,000m² of new office supply was introduced to the market in the past 12 years alone.

Forza Capital co Director Adam Murchie said “We have witnessed CBD development land values increase five to seven-fold over the last decade.

“This means higher rents are necessary to justify new supply and we therefore expect to see upwards rental movement on existing stock until such time as economic rents support the supply of new space.”

The following three examples of land transactions for major office developments (on a per developable metre basis) illustrate the price increases, from $454m² in 2006 to almost $3,000m² in 2018.

The current vacancy rate is 3.6%, the lowest level in 10 years. The Melbourne CBD office market is now approximately 4,500,000m² and with a new supply pipeline of 540,000m², is expected to exceed 5,000,000m² by late 2019.

Ashley Wain continued, “Melbourne’s population is currently growing at a rate of 2.7% per annum or 145,000 new residents each year, which is resulting in a fundamental alteration in long term annual office absorption forecasts.

“Essentially, the commercial office market can absorb annually almost double the amount of space it could a decade ago; we expect this will result in a supply shortfall and an increase in rents.”

“In addition,” said Adam Murchie, “space compression through hot desking and open plan accommodation has kept a lid on rental increases, but its impact is abating.

“Over the last 10-15 years office densities have reduced significantly from one person per 20m² to something closer to 1:12m².

“Our view is the ability to further compress workspace densities is limited and thus it will increase pressure on future rental uplift.”

Forza Capital expects to see reasonable rental growth for existing office space before meaningful new supply is developed.

Ashley Wain said, “Interestingly, we see office vacancy risk as a real opportunity at the moment.

“Financiers are not supporting transactions with significant vacancy; hence they have negative cap rate pressure on them.

“It’s our view that the right assets can be positively positioned to capture both rental growth and cap rate re-rating, which could potentially create significant value.”

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Adam Murchie

The introduction of the National Disability Insurance Scheme, together with an increased desire for thematic and impact investments, is creating the opportunity for the development of a disability housing investment framework says boutique property fund manager, Forza Capital.

Adam Murchie, co-director of Forza Capital says, “Disability housing is at a crisis point, a little like aged care was decades ago.

“Disabled people are either in aged care or remaining with parents or carers because they literally have nowhere to go.

“Government appears unable to provide the necessary supply, and we think there is a real opportunity for quality disabled housing supply to be delivered by the private sector.”

Forza Capital was recently involved in delivering a number of disability compliant apartments in its Supply Co development.

Forza Capital co Director Ashley Wain said, “We were approached by Guardian Living, a private company focused on providing apartment style Specialist Disability Accommodation (SDA) for those with complex physical and cognitive disabilities who are registered NDIA clients.

“We worked closely with Guardian Living on delivery of the apartments and through this process, our eyes were opened to both the need, and opportunity, for the delivery of quality disabled accommodation.”

Adam Murchie continued, “We loved the concept of integrating this sort of accommodation into our Supply Co project.

“It completely aligned with our ESG principles and we think we can use our skills in funds management and property to build an impact investment vehicle in this space.

“We are working with a few other well credentialled groups on this concept at the moment and we believe there is scope to deliver a high-quality outcome for disabled occupants while providing investors a fair return on capital.”

At Supply Co, to meet Guardian Living’s requirements apartments were developed to LHA (Liveable Housing Australia) “platinum plus” standards which required features such as level changes for easy wheelchair access, adjustable bathroom vanity units and kitchen work areas, assistive technology (lighting control, electrically operated doors and windows, smart appliances) and high quality finishes with a high resistance rating.

Stephen Vick, the Development Manager of Guardian Living said, “Guardian Living has a strong philosophy on design, tenant selection, building quality and relationships with the overall goal to facilitate people with disabilities to leave hospitals, nursing homes, ageing parents and group homes, and to support them to live independently in their “own” apartment.

“For many of the tenants moving into an SDA apartment, it will be one of the most significant and challenging times of their lives.

“They will be leaving a group or nursing home, or even a family home, with structured care and very little emphasis on independent living; this is a massive step and we want to get it right.

“To deliver this, we need to partner with projects that are well connected to the community, with apartments of a sufficient floor area and a developer who both shares our vision and takes the time to understand the process.”

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Ashley Wain

Boutique property fund manager, Forza Capital, is commencing settlement of its 129 unit apartment complex, Supply Co, located in David Street, Richmond this week.

Completion of the development marks an important milestone in a project that straddled a number of major market shifts.

The site, acquired by Forza Capital in January 2014 at the attractive price of $5,875,000 ($45,000 per unit site), obtained a planning permit in late 2014 and investors wished to proceed with developing the site. Forza Capital raised additional capital from its high net worth client base in February 2015 and commenced sales and marketing of Supply Co in mid-2015.

During late 2015 and early 2016, investment sales in Melbourne slowed dramatically and debt providers substantially retreated from the market. The Fund, which had a rare “non-recourse” construction debt facility from a major bank, was well placed to ride out these gyrations. As pre-sales rates slowed significantly, many projects came to a grinding halt. At the same time, talk of a massive oversupply of apartments surfaced.

While Forza Capital was not concerned with talk of oversupply given the significant difference between ‘mooted’ and ‘actual’ supply, its Supply Co project demonstrates the importance of acquiring well.

Ashley Wain, co-founder of Forza Capital said, “Frankly, we cannot work out how many feasibilities stack up at the moment.”

“We know the cost of construction, the pricing (and availability) of debt, and the cost of sales and the sales rates.”

“When we plug these variables into a feasibility, and then overlay it with the price sites are being acquired for, we cannot understand how many projects will ever get out of the ground”.

The team at Forza Capital has been focused on settlement risk from the outset and takes the view that the sale of an apartment for a big price does not guarantee successful settlement.

According to Wain, their focus was on ensuring the delivery of well-priced, highly specified apartments that would assist the business reduce settlement risk.

“The feedback from our valuers and purchasers has been excellent and our settlement consultant has been delighted by the straightforward process experienced with Supply Co.”

“We are 100% pre-sold and expect no more than 3-4 settlements to potentially be an issue.”

Forza Capital also focused on delivering strong environmental and social outcomes on the site. Numerous ESD features were incorporated into the development, together with the delivery of two major art installations, including a six-storey high artwork. Seven dwellings were sold to a disability services provider, one of the first transactions of its type in such a development.

“Buying our site well enabled us to ride out changing market conditions and invest in value adding opportunities,” said Forza Capital co-founder Adam Murchie.

“Although various elements of our feasibility changed substantially, by having a margin of safety through acquiring the site well, we were able to navigate our way through change while retaining a strong net profit.”

“It also allowed us to invest heavily in sustainability initiatives, which is important to us and our investors”.

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“Rental growth is driven by simple economics and we are seeing demand outstrip supply,” says founding Director Adam Murchie.

Forza Capital says the market rent for new office accommodation is generally determined by the terminal value of building a new project. Over the past five to six years the tightening of investment yields, which have generally tracked bond rates, have helped keep downward pressure on rents as office developers were obtaining their margin from yield compression, and not growing rents.

“With bond yields now trending upwards, the market can no longer look to yield compression to keep rents constrained,” commented Mr Murchie.

“Instead, softening investment yields are anticipated to put upward pressure on rents as new supply will not be economically feasible until the softening in cap rates is offset by substantial rental growth.”

One of the key drivers of the increased cost of delivering new office stock in CBD and surrounding inner city locations has been the stratospheric growth in land values.

“In the past decade we have seen CBD development land values increasing five to seven-fold; at the same time, the cost of construction has increased at nowhere near this rate,” Mr Murchie said.

“As a result, the overall cost of delivering new office stock has increased dramatically, which means higher rents are necessary to justify new supply.

“Typically, you see upward rental movement on existing stock until such time as economic rents support the supply of new space”.

Interestingly, the primary driver for increasing land values has been the repurposing of office development sites to residential developments. Supply side constraints are being further exacerbated by demand side drivers.

The current vacancy rate is 3.8%, the lowest level in nine years and net population growth is as strong as it has ever been. The Melbourne CBD office market is now approximately 4,500,000m2 and with a new supply pipeline of 540,000m2, is expected to exceed 5,000,000m2 by late 2019.

There are three dynamics Forza believes will drive an increase in office rents:

1.     Melbourne’s population is currently growing at a rate of 2.7% per annum or 125,000 new residents each year, which has resulted in a fundamental alteration in long term annual office absorption forecasts. Essentially, the commercial office market can absorb annually almost double the amount of space it could a decade ago. We expect this will result in a supply shortfall and an increase in rents.

2.     The move to open plan accommodation, followed by the concept of hot desking, has seen average office densities reduce significantly from 1 person per 20m2 to approximately 1:12m2. Forza Capital’s view is that the ability to further compress workspace densities is limited and thus will increase pressure on future rental uplift.

3.     The war for talent is leading businesses to continually upgrade their office accommodation to make it relevant to the new and evolving workforce. To attract the best human capital, a key element is the quality of the office accommodation, in addition to location relative to social amenity such as cafés, restaurants, bars, gyms and public transport.

“We are witnessing a combination of low vacancy, modest supply delivery, significant increases in land value, increasing construction costs, record population growth, investment yields that have reached the bottom of the cycle and a growing number of Gen Y employees that demand higher quality accommodation,” said Mr Murchie.

“All of these factors combined suggest rents for new office stock will be trending upwards in the near future.”

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Adam Murchie

There’s been a marked uptick in commentary about market cycles, market pricing and the risk of correction. Pricing and valuations are heightened across many asset classes, bringing into play the threat of downside risk. Given this scenario, how can investors’ portfolios be best positioned to withstand a downturn?

One aspect rarely addressed is the impact investment structure can have on investment performance.

The liquidity conundrum

Adam Murchie, director of Forza Capital commented: “Many investment operatives are fixated on the need for liquidity, that is, the ability to enter and exit an investment when you want.

“Without doubt, liquidity and the ‘easy’ strategy of picking an index as opposed to specific stocks has given to the rise and rise of ETFs.

“However, just as the ETF’s have risen in value off the back of their own momentum, what happens when the pendulum swings the other way?”

Liquid markets rely on rational investor behaviour to operate efficiently. However, as history proves, in falling markets investor behaviour becomes irrational and thus market movements are often magnified.

The liquidity and structure of ETF’s amplifies this even further, much in the way gearing affects an investment outcome – as such, this is something that needs to be considered when assessing a portfolio for risk.

Illiquid investment structures

“In property, which is our area of expertise, we have the luxury of having well established, well informed listed (liquid) and unlisted markets,” said Mr Murchie.

“As such, property is an exemplar for highlighting how a different investment structure can result in materially different outcomes.”

Figure one illustrates the returns from listed property and unlisted (core) property for the three years pre and post the GFC and is, therefore, is a strong representation of the impact of the cycle.

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Adam Murchie

The recent news that ASIC has commenced legal action against AMP is not surprising. The fallout that has resulted from the Banking Royal Commission, along with ASIC’s announcement that its financial services reforms has enshrined conflicts of interest within vertically integrated advice and product providers, have not come as a surprise to many long term independent service providers in the investment sector.

Forza Capital, a property investment provider to independent financial advisers and family office clients, saw danger signs when the Financial Services Reform (FSR) Act was first introduced. The regulations and compliance, especially for retail service providers, were so significant and so all-encompassing that the only real outcome was the merger and consolidation of many smaller operators that could no longer efficiently provide services.

“In effect, this was when we saw the first real wave of vertical integration occurring,” said Adam Murchie, a founding director of Forza Capital.

“Many smaller firms either sold out or rolled into a larger licensee. Under these bigger dealer groups, they were then driven by Approved Product Lists, white labelled products developed by their licensee and attractive commissions driven by business (or advice) volume.

“In effect, the changes removed competition and made it harder for the independent product providers to get distribution.”

The FSR changes were so significant they ultimately led to a range of unintended consequences for investors; a reduction in available products, stifled competition and innovation, and a focus on fees/commissions as opposed to advice outcomes.

The GFC then resulted in another round of huge changes to the advice industry via the Future of Financial Advice (FOFA) regime. The FOFA changes, while welcomed and required, significantly changed the business model of the advice sector; it impacted the ways advice was provided, and thus resulted in further consolidation and vertical integration.

“The FOFA changes were necessary because the reality is, the commission on advice model did not work,” said Mr Murchie.

“We have seen the very real ramifications of conflicted commission models laid bare before the Royal Commission and the truth is ugly.

“When FOFA was introduced, it further enshrined vertical integration while the sector worked out how to deal with the complexity of the changes they were now governed by.”

As the FOFA regime became more established, and advisers digested what being part of a vertically integrated model entailed, many started to see the issues, primarily conflicts of interest, that vertical integration bought to the advice dynamic.

“Water started to find its level,” Mr Murchie said.

“We saw a distinct shift with many advisers obtaining their own AFSL, establishing their own truly independent business models and going to a full fee for service offering.

“This shift has been a massive benefit for independent product providers as we find these independent advisory groups actively scour the marketplace looking for the best of breed investment providers.”

Having struggled with the integrity of the commission-based model, Forza’s directors designed their business around a zero-commission model. As a result, Forza only deals with fee for service advisory groups; when the business first launched in 2010, there were few such advisory firms, so it was a somewhat pioneering approach. Over the last five years, Forza has seen a massive shift in the advice sector to fee for service pricing and a shift in the willingness of independent advisers to engage.

One of the key differences noticed was that these independent, self-licensed advisory groups do their own due diligence and are therefore invested in the process and better understand the offer. One such firm is Providence Wealth, an independent advisory group underpinned by a single principle – to provide advice aligned only to clients’ best interests. This principle has served Providence Wealth, and its clients, well for nearly 20 years.

“We believe there is an inherent conflict in the manufacture of product and financial/investment advisory, as has been clearly demonstrated during the Royal Commission” said Grant Patterson, Managing Director of Providence Wealth.

“Being truly independent means we have no constraints when it comes to investment selection and the managers we trust and partner with; this results in the freedom to find the best opportunities, which in turn drives a better potential outcome for our clients.

“Being unfettered by institutional ownership or product manufacturing, independent practices are able to provide advice that’s honest, professional and unbiased.”

“Independent advisory businesses such as Providence Wealth don’t hide behind an APL or research house,” said Mr Murchie.

“Their advice is as good as the due diligence they have done. It is their name attached to the recommendation and it has bought a greater discipline where there is no conflict by way of commissions.

“We see this as a great outcome for investors. It has made advisers more invested in the process and more receptive to innovative ideas and opportunities as a way to create value for their clients.

“For this reason, high-quality operators were not dragged through the mud before the Royal Commission.”

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Adam Murchie

At Forza Capital, the team spends a lot of time speaking to both real estate agents and investors. There is no substitute for being at the ‘coal face’ for eliciting information that often precedes cycles or opportunities (or both).

For some time, these discussions have been uncovering a subtle pivot in asset allocation, in particular an increasing allocation to cash and a reduction in assets that are seen to have reached their cyclical peak.

According to the Capgemini Asia Pacific Wealth Report 2017, there have been several changes to the 2017 asset allocation of Australian High Net Wealth (HNW) investors when compared to their previous years’ report, as illustrated in figure one.

“While we are not suggesting a correction in property or bonds near term, there is a distinct investment link between the two,” said Adam Murchie, Director of Forza Capital.

“Given upwards pressure on bond yields, it is natural to see investors dialling back risk in both sectors.

“We have seen a number of clients exit investments where they feel the value adding has been completed.”

Mr Murchie continued, “The consensus has been that holding the investment for an extended period exposed them to greater risk than the future return profile would support, therefore they were better to convert to cash, sit tight and wait for future opportunities.”

Broadly, Forza tends to share the view of the HNW investors and is keeping an eye on bond pricing and property capitalisation rates in certain parts of the market. Debt can’t be priced at these levels forever and any mean reversion will hurt assets on very tight capitalisation rates.

“Notwithstanding this commentary, there are several areas where we identify opportunity, although it’s necessary to be prudent to ensure than any acquisition is robust enough to withstand any market shocks,” said Mr Murchie.

HNW versus retail asset allocation

The HNW asset allocation data presented in figure one differs considerably from traditional asset allocation for retail clients, which is illustrated in figure two.

Clearly, HNW investors have a much higher allocation to property and cash, which is consistent with Forza’s experience. This is further supported by the BRW Rich 200 List where asset allocation to property featured heavily; of the list, 80 people (40%) either made their wealth in property or use it as a major store of their wealth. On the same basis, property was a primary asset class for 47.55% of the Rich List wealth.

“This demarcation between the investment allocation of the wealthy and that applied to retail investors has always interested us,” said Mr Murchie.

“We often wonder why retail investment allocation is not more closely aligned to those who have had immense investment success.

“These statistics support what we see with our clients; many have a high cash weighting at the moment and are more comfortable with less liquid investments than retail investors.

“This liquidity element is interesting to us; when we speak to people about the need for liquidity, it is safety mechanism allowing them to exit an investment if they need to. If you drill down further, most have no intention to liquidate, and if they did so, it would likely be at an inopportune time as they respond to market cues.”

Interestingly, for a traditional retail investor’s portfolio, 90% of their portfolio volatility comes from their 60% allocation to equities. It is no wonder then that HNW investors favour more illiquid assets, property in particular, to mitigate portfolio fluctuations and risk.

We only wonder why more people in the investment sector don’t take notice.

The post Interesting trends in HNW asset allocation highlight investment cycle appeared first on AdviserVoice.

An investment manager’s role is to provide a fair risk adjusted return on their client’s invested capital.

In our experience as investment managers, a fundamental shortcoming we often see is poor ongoing communication between managers and financial advisers.

Financial advisers are the life blood of investment managers everywhere. You manage the ultimate client relationship, filter information, navigate personalities and ensure that any investment meets your client’s needs. Without this relationship, investment distribution would be highly inefficient and investment managers everywhere would be required to cross the divide and provide personal advice.

Given the importance of this symbiotic relationship, one would think that keeping advisers and their clients fully informed would be the cornerstone of all investment managers. Primarily the communication relationship focusses on distribution, that is getting the capital in the first place, but strong communication also needs to extend across the investment lifecycle.

Over the years, we have been complimented by advisers for our open and honest communication. It is policy to tell it how it is – good, bad and indifferent. It is what we would expect from anyone that was managing our money. However, this feedback also got us thinking – how (and what) exactly are others communicating (or not)?

Obviously we are making a generalisation here – there are many investment managers that are brilliant at communication – but the fact is generally communication between investment managers and advisers could be improved.

The investment management sector can at times be guilty of forgetting it is not actually our money. There can also be a conflict between what is best for the business as what is best for building the investor’s wealth. This can a very dangerous position as one can forget why they exist in the first place (that is, to build investor wealth).

Investment managers are stewards or custodians of client’s wealth. It is always their money. Our role as investment managers is to provide a fair risk adjusted return on their invested capital.

We are starting to approach a point in a cycle where investments can be highly value accretive to a business, but only marginally accretive to investors (especially when adjusting for risk). This also occurred back in 2006 and 2007. At such a point in the cycle, raising capital can be quite easy. The real issue is whether you can allocate it wisely. Unfortunately, only time yields this answer and as Warren Buffet so eloquently said “only when the tide goes out do you see who has been swimming naked”.

Everyone is in business to make a profit but when you are in investment management, there can be a fine line between what is best for the business and what is best for advisers and their client. Our guiding light has always been “What decision would we make if we were the investor”?

This brings us back to the communication point. Communication with advisers should be based upon a simple standard – what would you want to know if you were the adviser? Clearly you don’t want to be informed of day to day management, but you expect to hear about matters which go substantially to risk and value (both positive and negative).

Generally speaking, you understand that investing is about risk. You do not expect there to be “blue sky” all the time. But you expect, and rightfully so, to know about things when they are not going to plan. Good managers disclose this and then set out the manner in which they intend to rectify affairs.

Further to this point, it is imperative that investment managers take communication cues from advisers. If you are asking questions it is because you seek information or answers. By way of example a little over 12 months ago we had a number of advisers nervous about an investment position we had on their behalf. Responding to the cues, we called an EGM to vote on either selling out of the position or continuing on with the investment strategy. As manager, we put substantial future earnings at risk. Advisers could have voted to realise the asset and we would walk away with nothing. However after providing detailed information, and giving advisers full control over their clients capital, they voted to retain the investment.

The feedback we received from our advisers was unbelievably positive. They valued the open and honest communication and the fact we deferred to their clients best interests. Whilst we took a large risk in that we could have lost our mandate, by taking this risk, it probably generated a decades worth of goodwill for our business.

During the GFC, poor communication was the undoing of a number of managers. They communicated nothing to advisers, despite the fact they intuitively knew their clients investments were not performing. What resulted was a number of “protest votes” where advisers voted with their feet by either withdrawing their investments or removing the manager. Advisers knew the investments were not performing – every asset class at the time was tanking – but they resented managers not communicating the full picture.

Investment management at its heart should be a simple concept. Act as if the money was your own and communicate the messages you would expect if you were the adviser. Your business might grow a little more slowly than if you only took a strict business focus, but longer term you (and your adviser clients) will be far better off.

The post Managing money and the art of communication appeared first on AdviserVoice.

Adam Murchie

The release last week of the BRW Rich 200 List highlighted a significant demarcation between the asset allocation of HNW investors and the asset allocation prescribed for ordinary Australians.

Traditional retail client financial advice asset allocation would see asset allocations in the following ranges:

• Australian shares (35%) – range 25% to 45%
• International shares (25%) – range 15% to 35%
• Australian property (10%) – range 5% to 20%
• Cash (5%) – range 0% to 10%
• Australian bonds (15%) – range 10% to 25%
• International bonds (10%) – range 5% to 20%
• Overall growth assets (70%) – range 50% to 80%

Compare this with the Capigemi Asia Pacific Wealth Report 2016, which indicates that Australia’s HNW investors have the following asset allocation:

• Equities 27.9%
• Property 25.6%
• Cash 19.0%
• Australian bonds 14.6%
• Alternative investments 12.9%

The above asset allocations for HNW Australian investors is further supported by the recent release of the BRW Rich 200 List. In particular, asset allocation to property featured heavily; of the list, 80 people (40%) either made their wealth in property, or it is a major store of their wealth. On the same basis, property was a primary asset class for 47.55% of the Rich List wealth.

Adam Murchie, a director of Forza Capital said, “For a long time this demarcation between the investment allocation of the wealthy and that applied to retail investors has interested us.”

“We often wonder why retail investment allocation is not more closely aligned to those who have had immense investment success”.

In particular, the heavy slant to property also has the benefit of removing volatility.

Mr Murchie continued, “Research undertaken by Atchison Consultants indicates that the higher a proportion of direct property in a portfolio, the lower propensity for price volatility and capital loss.”

“Furthermore, it has been highlighted that based on traditional portfolio theory, 90% of a retail investors’ portfolio volatility comes from their 60% allocation to equities. It is no wonder then that HNW investors favour more illiquid assets, property in particular, to mitigate portfolio fluctuations and risk.”

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