With interest rates at record lows, there is a constant frustration among investors in the chase for greater returns. This low-risk strategy is about creating an alternative to cash investments. An investment that will comfortably chase down inflation, however, will not race to the finish line.
First, let’s define “low risk” and what it is trying to achieve.
A low-risk investment is one with less than 50% exposure to the share or property markets. Over a three-year time frame a low-risk investment should achieve returns of 5%- 6% a year. So it is a very solid replacement for cash.
This type of investment will show minimal volatility as a large proportion, at least 50%, is invested in cash and other defensive asset classes such as government bonds. So even if there are short-term corrections in the sharemarket or property holdings, the impact will not be as significant.
We are also seeking a high level of certainty in the income we expect to receive, and absolutely want to ensure there is no debt associated with our investments.
We also need to be patient. At this lower level of returns, $5000 will take 25 years to get to $50,000. So perhaps this is your rainy day fund.
So where to start …
I am a big believer in keeping things simple. So to build this portfolio we will be looking at splitting the investment into two: •
$4000 into the Allan Gray Australia Stable Fund; and • $1000 into BrickX property investment platform.
Allan Gray Australia Stable Fund
This fund is a fantastic alternative to cash for investors. Although the minimum investment is $10,000 or $500 a month, with a regular savings plan you could invest using a low-cost platform for access with just $4000. For example, by using Asgard Infinity eWrap the admin fee would be just $75 a year.
The fund is able to move fluidly in and out of the Australian sharemarket depending on conditions and the opportunities it finds. With at least 50% invested in cash and money market instruments, this gives us a big tick on the defensive side.
The focus of this fund is to achieve a return in excess of the Reserve Bank cash rate with less volatility than just being invested in the sharemarket.
As a result you end up with a hybrid investment that comfortably walks the line between return and stability. The five years to May 31, 2017 resulted in an average return of 7.6%pa. Importantly, an average income distribution made up 4.1% of this.
During this time the fund has had a maximum exposure to the Australian sharemarket of around 40%, with a minimum exposure falling as low as 15%. This is a genuine case of the fund manager making clear calls on whether the sharemarket is able to outperform the cash. The manager is also able to help protect investors’ capital in periods of high volatility such as September 2015, when they pulled back equity exposure to about 23%. However, by February 2016 the manager had increased its holding of Australian shares to around 40% to take advantage of the then
undervalued market. Today the exposure to the market sits at just under 25%.
Yes, this fund can lose capital in the short term. However, with this type of investment there is opportunity for the manager to make back losses, as it did during the 2016 calendar year. This fund is an exciting and interesting alternative for cash investors in a low-rate environment.
So of your $4000, between $600 and $2000 could be invested in the Australian sharemarket. It is up to the fund manager to determine market conditions and the level of risk that is right at the time. So you can sit back knowing this part of your portfolio is being actively managed for volatility risk.
BrickX property investment platform
Even in a low-risk portfolio we need to add an element of risk. For many Australians investing in residential property with $1000 seems like an impossibility. This is where BrickX comes in. Launched in 2016, it has had phenomenal success, with 12 properties on the platform. So how does it work? The BrickX team is made up of an investment, buying and adviser panel. They are focused on purchasing properties that provide a balanced and diversified investment opportunity. Each property is divided into 10,000 bricks so an investor can purchase a piece of a property for under $100.
Now we need to remember that as low-risk investors we need to focus only on BrickX properties that do not have any debt. Currently there are four that fit this profile: 322 Esplanade East, Port Melbourne, Vic, a two-bedroom, two-bathroom house with a current BrickX price of about $156.
4/6 Miller Street, Prahran, Vic, a two-bedroom, one-bathroom unit with a current price of about $121. 18/5 Parriwi Road, Mosman, NSW, a two-bedroom, two-bathroom unit with a current price of about $145. 1/159 Enmore Road, Enmore, NSW, a one-bedroom, one-bathroom unit with a current price of about $70.
My approach would be to buy two bricks in each to gain diversification across suburbs and types of property. With transaction costs this will come to around $1000.
From these investments we will collect regular rental income and benefit from any capital growth while we hold them. For these properties BrickX has estimated total rates of return of between 5.3% and 12.22%, which includes rent and capital growth, and has allowed for expected expenses. Even at the lower end this meets our financial needs and objectives.
With both investments the portfolio will have on average 33%-60% invested in growth assets.
Dominique Bergel-Grant, director of Leapfrog Financial, is a financial planner and mortgage adviser. leapfroglife.com.au
This fund is an exciting alternative for cash investors in a low interest rate environment