While continuing to manage customised model portfolios for select clients, Zenith decided in mid-2008 to also launch a suite of preset ‘platform-based’ model portfolios that would provide a cost-effective solution for advisers looking for independent investment and portfolio construction advice.

 Zenith now offers ‘platform-based’ model portfolios across all of the major administration platforms.

Associate Directors and joint heads of the recently launched Zenith Investment Solutions division, Glen Franklin and Ben Davis today announced the results of the composite performance of Zenith’s ‘platform-based’ model portfolios over the past three years ending July 31, 2011, relative to the corresponding median fund return within each risk profile.

“The results show, Zenith’s models have significantly outperformed the median over all time periods, both in an absolute sense and on risk adjusted basis (as measured by the Sharpe Ratio),” said Glen Franklin.

“Importantly, Zenith’s models have performed very well versus the median over the most recent 6 month period, which has been a particularly challenging period for investing.”

Ben Davis pointed out that in particular, the inherently defensive positioning of fixed interest and alternatives funds within the portfolios has provided a strong buffer during the recent falling equities markets.

In addition, the income returns produced by the conservative and moderate portfolios have been competitive with term deposit rates, whilst still providing potential for capital growth.

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“SPPS has been developed to align with the seven risk profile asset allocations common to widely-used risk profiling software. Combining capital market inputs with local qualitative assessments of broadly available managed funds, the WMS team identifies strategies that it considers “best of breed” to construct a non-tailored approved product list (APL) and model portfolio suite,” said S&P Fund Services managing director Mark Hoven.

S&P monitors and updates the portfolios regularly, and as part of the service also provides subscribers with monthly performance updates and comprehensive quarterly reports, including economic commentaries.

Mr Hoven added: “SPPS is specifically designed for advice groups that are looking for a cost-effective, non-tailored APL and model portfolio solution.”

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The enhancements include simplified share and managed funds trading, significant enhancements to template (model portfolio) functionality and online corporate actions for eWRAP super and pension accounts.

Head of Asgard, Craig Lawrenson, said Asgard had worked closely with advisers to ensure the changes would result in a simpler, more intuitive and user-friendly trading experience for advisers.

“We continue to invest in the eWRAP platform so that it streamlines portfolio administration and continues to deliver the features and functionality that advisers need to reduce the cost of providing advice.

“We have over $6.2 billion of funds under administration currently using templates, and these new enhancements to our templating functionality will mean advisers can now create templates comprising cash, managed funds and equities which they can link to multiple clients.
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In addition they‟ll now have the added ability to set portfolio preferences at an individual client level to tailor the template to the individual needs of the client.
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“They’ll benefit from greater portfolio administration efficiency, be able to keep clients’ portfolios on track with our automatically-generated rebalance instructions and it’ll be easier to customise templated portfolios to ensure they reflect the needs of different clients. The new features mean clients can be advised individually but where appropriate execution can occur collectively.”
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Mr Lawrenson said enhancements to share trading within eWRAP were particularly timely as the inclusion of equities in portfolios continued to see a resurgence. Simplified share and managed funds trading, and online corporate actions have also been introduced for Asgard’s Managed Profiles platform. Both eWRAP and Managed Profiles are accessed through Asgard’modes award-winning AdviserNET which recently won the “Best Navigation and User Interface‟ award in the 2010 Investment Trends Platform Report.

Details of the enhancements

Simplified share trading.

The new-look trading screen will consolidate the existing buy investments and sell investments screens into a single screen allowing advisers to:

• Buy and sell managed investments and shares for a single client, on the one screen
• Take advantage of real-time trading
• Place trades using pre-settlement sale proceeds
• Have access to market and company research.

Smarter portfolio management.

Advisers will be able to create templates for cash and equities investment leading to more effective and efficient portfolio management. Additionally, advisers will be able to create a combination of portfolio templates. Template preferences will be able to be set depending on individual client need. For example, templates can:

• Include or exclude assets
• Substitute one asset for another
• Lock an asset so it can‟t fall below a limit an adviser nominates
• Specify a minimum trade or holding value before a buy or sell can occur.

Online corporate actions.

Advisers will be able to manage corporate actions online and participate in dividend reinvestment plans.

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More than a decade later, Lonsec celebrates the model portfolio’s strong track record in providing advisers with a low-cost, direct equity portfolio solution that has historically delivered excellent returns.

The manager of Lonsec’s Portfolio Services division, Jeremy Pree, commented, “Whether it’s been a bull or bear market, the model portfolio has consistently outperformed its benchmark, returning 16.2% per annum since inception [as at 31 January 2011], outperforming the S&P/ASX-
100 Accumulation Index by 7.0% per annum over the past ten years.”

“We think this is worth celebrating since there are few equity model portfolios available today with a comparable track record,” said Pree.

The longevity of Lonsec’s model portfolio can be attributed to its high-conviction approach, which was identified at inception as a successful strategy to deliver alpha.

“Highly concentrated portfolios are increasingly prevalent in today’s marketplace, however, ten years ago there were few direct equity model portfolios with less than 20 stocks,” said Pree.

The success of this model portfolio can also be attributed to Lonsec’s medium-term top-down macroeconomic and sector-theme approach to stock selection and portfolio construction rules, which have resulted in low portfolio turnover, averaging between 20-30% per annum.

“A low-turnover outcome supports the case that direct equity portfolios can provide financial advisers with a low-cost and tax efficient solution,” said Pree.

In September 2010, Lonsec increased the number of stocks in the model portfolio from 12 to 15, making the first significant structural change since inception. The expansion aims to strike a better balance between portfolio risk and potential return.

Pree commented, “The 12-stock Lonsec Core model portfolio has outperformed its benchmark consistently, but we believe the expansion to 15 stocks will help reduce volatility without reducing the strong alpha potential. Feedback from advisers suggests the revised portfolio has broader
investor appeal.”

“The benefit of having a few more stocks is expected to provide greater risk controls to minimise volatility within model portfolios. Volatility is the enemy in this post-GFC world and we feel that enhanced risk management will limit the effects of market volatility.”

The Lonsec Australian Equity Core Model Portfolio is available to financial advisers through Lonsec’s stockbroking and managed discretionary account services, and through partnership with external MDA and SMA platforms BlackRock, OneVue, WealthPortal, UMA Select, Wilson HTM
and more recently, Hub24.

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Head of BT Wrap, Chris Freeman, said the reports build on the enhanced Dealer Group DeskTop launched last year, as part of BT Wrap’s model portfolio offering, and will make it easier for dealer groups to support their advisers through better visibility of their total holdings.

“The latest product release demonstrates BT Wrap’s ongoing commitment to providing market leading platform functionality which has already delivered a market leading equities trading centre, bulk trading, consolidated order screens and model portfolio tools in the last 12 months,” he said.

“This week’s roll-out includes two new desktop reports and three bulk reports that will drive efficiency for dealer groups, their advisers and their clients.

“The reports provide a range of summary options, including the ability to view results across single or multiple badges, allowing the dealer group to provide better business-building strategies as well as support services such as compliance and legal to their advisers.”

“For example, dealer groups will be able to have immediate visibility of the impact changing a stock in their APLs and respond and tailor accordingly. Another benefit is managing the impact of a frozen fund or significant drop in a unit’s value. By having immediate access to their group exposure, as well as individual adviser impact, the dealer group can target advisers and clients with immediate information and support.”

Head of Distribution & Alliances at Genesys Wealth Advisers, Pia Zulueta, said the variety of reports will allow them to more meaningfully track their business and tailor support services to their advisers.

“With real-time data and a huge array of inputs the benefits will be multi-fold. As a dealer group we will be able to quickly identify trends, understand the impact of business decisions and correlate market data to our own. The visibility to the licensee and the support it will provide our advisers will be hugely beneficial,” Ms Zulueta said.

The Dealer Group DeskTop badge reports include:

• Total Wrap business report: A summary of total Wrap business across various products as at COB of the prior full business day including total funds under advice, average client balances and loans and breakdown of total holdings across managed funds, term deposits, equities and cash.
• Periodic summary report: A summary of movements in total Wrap business across pre-determined periods including opening and closing balances, total deposits, withdrawals, transfers and distributions.
• Bulk reports: A summary of monthly investment flows, clients holding

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In its first quarter update to investors, the AAIC has decided to maintain a neutral stance on Australian equities, hold an overweight to income securities and maintain listed property allocations at zero across all of Implemented Portfolios’ individually managed accounts.

According to AAIC member Jon Reilly, Australian Equities will be supported by continued demand for resources from China, India and other emerging markets, whilst the banks may have slow growth but will still provide solid returns underpinned by their dividends.

“This quarter we have determined to move towards a lower allocation in international equities, but will do gradually, taking advantage of further strength to lock in returns.”

“This is consistent with our investment strategy of buying when we view classes as fair value or undervalued and selling incrementally as they become more expensive,” Mr Reilly said.

Continuing to favour income securities over cash, the AAIC has held its overweight position and maintains a preference for securities issued by the major banks.

The committee’s assessment of A-REITs last quarter was that they were expensive and the outlook was likely to remain subdued. This assessment has not changed in the first quarter, and the portfolios have now moved to a 0% allocation to listed property.

“The AAIC’s decisions this quarter reflect the continued need to be cautious. We have positioned the portfolios defensively but will add to equities allocations when valuations become more attractive. On balance the portfolios will continue to capture the growth from Australian equities, and consistent distributions from the income securities exposure.” he said.

“In 2011 we expect there will be continued sluggish economic growth in the developed world, and significant risks from managing the build up of debt in those countries. Whilst growth rates will be better in emerging markets we are conscious that valuations are no longer as attractive as they once were, which will likely suppress longer term returns.”

The AAIC is comprised of a team of professional managers that make implementation and investment decisions for Implemented Portfolio’s range of Individually Managed Accounts. The quarterly update is the AAIC’s long term assessment of each asset class amid the broader context of the economic environment and investment markets.

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In releasing the Diversified Sector Report, Zenith Investment Analyst Graeme Miller said from an initial group of 109 Diversified products:

• 3 were rated HIGHLY RECOMMENDED and
• 22 RECOMMENDED.

The 25 Funds that were rated RECOMMENDED or above have been placed on Zenith’s Recommended List and are candidates for client model portfolios.

Of this number, 11 Funds are new additions to Zenith’s Recommended List.

Given the high threshold required to achieve a HIGHLY RECOMMENDED rating, only 2 investment managers and 3 funds have attained this rating at the completion of this sector review. These funds are:

“Additionally, this year Zenith surveyed its client advisers and sought to provide them with additional insight they in turn may utilise to address many of the questions and issues they encounter when providing wealth creation, financial and retirement strategies for their clients,” said Graeme Miller.

Specifically, the three key areas of concern were:

• Is it appropriate for investors to have a heavy ‘home-country bias’ to Australian Equities?
• Is investing in term-deposits for income a sound investment strategy?
• How does Zenith fit Emerging Markets into a strategic asset allocation?

Home Country Bias

Several industry commentators have recently pointed to Australia’s relative economic health and strong growth prospects as justification for maintaining a high weighting to Australian Shares in a diversified portfolio.

Graeme Miller responded, “Zenith however, does not agree that a having a strong homecountry bias is optimal from a risk-adjusted returns perspective. Our principal concern lies in the increasing concentration in the Australian market, which is heavily weighted in the volatile resources and financials sectors.”

Zenith contends that two key drivers of these sectors – commodity prices and household debt, are both at historically high levels, which presents risks that should be managed prudently from an overall portfolio perspective.

Term Deposits and Investing for Income

A popular strategy amongst income-focussed investors has been to invest predominately into term-deposits.

Whilst term deposits are close to ‘risk-free’ in terms of the security of the cash flow received, they can also be considered a high risk strategy for those looking to invest for income whilst maintaining their standard of living over a prolonged period of time.

“One alternative to the above approach (which Zenith advocates) is to blend a number of income sources across asset classes, maturities, and risk levels, to ensure a well diversified flow of income that incorporates some protection against inflation,” said Graeme Miller.

Emerging Markets

There has been a continued push by managers to increase their exposure to Emerging Markets, which has given rise to the issue of what International Shares benchmark is most appropriate.

Zenith believes the use of the MSCI All-Country World Index (ACWI) is much more relevant for the purposes of performance evaluation, as at present managers are able to outperform MSCI World by including Emerging Markets exposure.

Classification of Defensive Asset Classes

Within a diversified portfolio, it must be ensured that defensive allocations are truly ‘defensive’ in nature.

Graeme Miller said, “This issue is part of a broader industry problem of inconsistent naming conventions being used for managed funds.”

“In reviewing Diversified Fund offerings, Zenith obtains full underlying portfolio data, which is then reclassified according to our own internal definitions of Defensive and Growth asset classes.”

“This allows us to make more accurate comparisons between funds, and results in funds being categorised according to their Defensive/Growth asset allocation. For example, the Advance Balanced Fund is classed by Zenith as a ‘Growth’ Fund, whilst the Perennial Capital Stable Trust is classed as ‘Moderate’.”

Zenith is confident the inclusion of responses and insights to current investor issues and concerns will be well received by the national research provider’s adviser clients that it will be incorporated as a feature or addition in future Sector Survey Reports.

For further information or a copy of Zenith’s Diversified Sector Review and Report, please contact –

John Nicoll
National Sales Manager
Zenith Investment Partners Pty Ltd
Tel (Direct): +61 3 8639 1212
Email: john.nicoll@zenithpartners.com.au

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What is the role of research houses now? Following the performance of the majority of research houses over the last three to four years – combined with the financial ombudsman ruling last year that now implies financial planners must conduct their own research – a lot of advisers are wondering if they even need to use a research house.

Are research houses now redundant? Or can they change with the times and actually start adding value to the financial advice process?

What value do the major research houses really provide to financial planners anyway? They did little or nothing over the last few years to assist financial planners and their clients to navigate their way through the financial crisis.

The role of a research house should be to scrutinise fund managers and their products, and exclude them if they are sub-standard, and to then let financial planners know the basis of their recommendations. It should not be the aim of research houses to appease fund managers by making it easy for them to get on the recommended list.

Research houses may need to consider to stop taking money (or is that bribes?) from fund managers for ratings so they can be unbiased and transparent in how they develop their recommendations.  Of course, they will then need to increase the fees they charge financial planners.  But this would then result in planners demanding a better service and more accountability from the research houses.  That would be a good result, but I can’t see it happening soon.

Financial planners feel there are a number of anomalies surrounding the output they receive from research houses, including:

• Asset allocation recommendations seem to remain static no matter where markets are placed.  They are the same today as they were during the bull market – shouldn’t there be some adjustment to take into account the value of markets today based on future forecasts?
• What have research houses done to beef up their research capability so that toxic investments are not recommended… or at least are weeded out in a timely fashion?

Most financial planners feel that research houses have not added value to the financial advice process, in fact many of their recommendations put financial planners and their clients in harm’s way.

For example, in 2006 and the first half of 2007 you didn’t need to be Einstein to work out that equity markets and commercial property markets (both listed and unlisted) were generally extremely over-valued.  And yet financial planners had little or no guidance from the research houses, and their asset allocation recommendations to planners didn’t change. This resulted in clients being hit hard when the inevitable correction came.

Further, the so called defensive portfolios contained within some research houses’ model portfolios proved to be not so defensive, with clients taking significant losses on the defensive portion of the portfolio, with no chance of a rebound on lost capital (as is generally the case with blue chip equities following a crash).

Why did this happen?  Was it because those research houses were chasing high returns on high risk fixed interest vehicles such as Basis Capital? I would love to know how some research houses justified shoe-horning  Basis Capital and other high risk investments into the defensive portfolio of their models.

Why chase high returns on the defensive portfolio anyway?  If the client needs higher returns, consider allocating more to growth assets provided they are not overvalued. Defensive assets should be exactly that – defensive.

Over the last 12 months many bond funds have continued to perform poorly due to a combination of interest rate risk and credit risk – and yet they continued to be recommended by research houses.  And still are.  Why be in these funds while interest rates appear to be only going one way – up. Consider that term deposits have proved to be very effective defensive assets over time, with the added advantage that clients know exactly what return to expect from term deposits. I find that there is a certainty about the outcome with term deposits that provides clients with a lot of comfort.

Financial planners and dealers alike recognise they are liable for the advice they provide to clients.  Therefore, if they can’t rely on the support and recommendations provided by research houses, they may as well do it all themselves by developing in-house capabilities.

Surely this option wouldn’t provide a worse result than the one we experienced over the past four or so years when we relied on the research houses?

To be honest, I would still prefer to rely on the research houses… but they need to lift their game first!

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The models, which operate under a managed investment scheme structure, are actively managed by Zenith on behalf of clients to ensure that the funds held in the portfolios and their weightings remain optimal over time.

Each model portfolio contains 8 – 15 of Zenith’s highest rated managed funds, with five risk profiles on offer (i.e. Conservative, Moderate, Balanced, Growth and High Growth).

Announcing the launch of the Zenith model portfolios, Zenith Associate Director Glen Franklin said, “The Zenith model portfolios provide a unique one-stop solution for advisers where they can have their client portfolios managed by Zenith’s highly experienced Adviser Services team, whilst at the same time drastically reducing the typical administrative requirements associated with making changes to client portfolios.”

“In addition, the underlying Linear Managed Account platform is a cutting edge, fully functioning administration platform that provides detailed portfolio valuations, portfolio performance and tax reporting for the client, with a pricing structure that is significantly lower than the major wraps”.

Linear Asset Management’s Managing Director Chris Hipkin added, “Zenith’s model portfolios will allow the wider financial planner network to utilise Zenith’s expertise in providing quality research.”

“Zenith’s strategic alliance with the Linear Managed Account platform will enable greater efficiency and functionality for advisers by highly researched diversified, multi-manager model portfolios, this is a great value add for clients”.

Some of the key benefits of the Zenith model portfolios are:

• Zenith model portfolios operate under a managed investment scheme structure. Therefore any portfolio changes can be made in a timely and efficient manner, without the need for individual Statements of Advice (SOA) and lengthy delays.
• Combined with the Linear Managed Account structure, Zenith’s model portfolios have the potential to revolutionise an advisers business from an efficiency and compliance perspective.
• All models are actively managed by the Zenith Adviser Services team, a team of professional investment analysts dedicated to the delivery of optimum portfolio construction.
• The multi-manager structure of the Zenith models enables Zenith to select what it considers to be “best-of-breed” funds for each asset class. This contrasts with single manager diversified funds where all asset classes are managed by a single funds management organisation that may not possess strong capabilities across all of these asset classes.
• Zenith’s five separate risk profile offerings ensure there is a Zenith model portfolio on offer to suit the risk appetite of most investors.
• Unlike a traditional multi-manager unit trust, the Managed Account structure used for the Zenith model portfolios ensures that clients retain the ownership of each of the underlying managed funds held within the model portfolio. Via the Linear Managed Account platform, clients can clearly see their unit holding in each underlying managed fund, as well as each fund’s individual performance.
• Quarterly reporting is provided, highlighting which underlying funds have been the key drivers of performance and providing a useful source of information for adviser discussions with their clients.

“Zenith has established and enviable reputation and track record within the financial services industry for innovation, consistency and service – and this has provided the solid foundation for client growth / retention.”

“The launch of Zenith’s model portfolios on the Linear Managed Account Platform will provide advisers an excellent facility and service to facilitate the attainment of their clients’ wealth creation and financial goals,” concluded Glen Franklin.

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Chris Freeman, Head of BT Wrap, said the model portfolio enhancements reinforce Wrap‟s position as market-leaders in the platform market.

“Our product innovation program truly sets us apart from our competitors,” Chris said.

“By working closely with our advisers, we know the trend towards more highly personalised service and tailored portfolios brings with it higher administration costs, increased compliance risks and time pressures.

“Model portfolios delivers a solution that allows for a more efficient, controlled and cost-effective way to create, customise and manage client portfolios.”

“The model portfolio enhancements, which work in any compliance regime, and the launch of a new Dealer Group DeskTop provide dealer groups greater comfort and control and advisers streamlined efficiency.”

Chris said the enhancements were part of BT Wrap‟s three-year development program, an investment of more than $18 million.

“This program really sets the benchmark for platform innovation and has already delivered a listed securities trading centre, SMSF administration enhancements and multiple client bulk trading,” he said.

“We‟ve continued our client-centric approach to the development of our platform by working with advisers and their staff to anticipate their needs – an approach that supports our commitment to maintaining a market leading Wrap platform.”

The enhancements will be launched to Wrap‟s Dealer Group partners on Monday, 20 September and all advisers on Monday, 11 October:

• Monday, 20 September – New Dealer Group Desktop The new intuitive Dealer Group DeskTop allows Dealer Groups to create model portfolios for their advisers, control adviser model access levels, and monitor model portfolio usage. This capability delivers increased control and oversight of the advice process.
• Monday, 20 September – New trading and ‘order status’ enhancements New real time cash updates for equities mean advisers can re-invest the proceeds from equity sales in the equities market without delay. The new ‘order status’ screen allows advisers to view all equities and managed funds orders for a single client– or across all clients.
• Monday, 11 October – New Model Portfolio tools The new Model Portfolio Tools allow advisers to link their clients to appropriate model portfolios containing equities, managed funds, cash or a hybrid of the three, and to tailor the blended portfolio for individual client preferences including substitutions, locked and excluded holdings The integrated rebalance and trading functionality makes it easy for advisers to implement portfolio transactions. This capability streamlines the advice process, enabling advisers to spend more time strengthening client relationships and less time on administration.

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