It pays to control your investment

MANY investors (and their financial advisers) choose to outsource control of their investments to fund managers of flexible or balanced funds. The belief (or hope) is that the fund manager has a better insight into the future than the rest of us.

Many respected fund managers make two structural mistakes with their balanced funds over the long term.

First, they are usually under-invested in shares over long periods of time. Second, they are almost always under-invested in listed property.

Fund managers explain their under-investment in shares by saying they want to protect investors from potential losses if the stock market drops.

A fund manager who remains conservative with equities in a balanced fund is more likely to keep his job because he won’t have shocking performance over a one-year period.

This does not necessarily mean he is doing a good job.

Listed property is more complicated. It is very rare to find balanced funds with a large exposure to property companies. This is partly because the property sector is quite small in comparison to the rest of the stock market.

I also believe that most balanced fund managers are not comfortable with listed property.

As you can see from the table below, an underinvestment in property was a very poor decision over the 10 years to October.

One could also infer from the table that the average balanced fund manager was underinvested in shares and property over the last 10 years, when interest rates were falling, which is usually very positive for bonds and property.

For an investor, there is no limit on the portion of capital that you can allocate to any asset class.

It is unlikely that a very large balanced unit trust will ever invest 15% or 30% of its capital in listed property.

This is not a problem for individual investors. Having said that, I am not advocating that you place all your money in listed property — far from it.

I feel you should create a structural asset allocation for yourself that is not determined by outsiders who know nothing about you. If you adopted a really simple approach to asset allocation, you could allot 50% of your assets to shares, 25% to bonds, and 25% to listed property.

It is only by investing in growth assets (shares and listed property) on a sustained basis that you will make the maximum possible return without taking excessive risk.

If the stock market continues to rise, fund managers are likely to reduce their exposure to shares and listed property even further. This is because they are judged over a one-year or twoyear period and not over a longer time frame.

If you have bought quality growth assets at a great price, the fact that they fall for a year or two might be irrelevant if you are investing for 20 years.