LOW RISK

Money Magazine Australia - - COVER STORY - DO­MINIQUE BERGELGRANT

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.

Rec­om­men­da­tion

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

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