1. Investment Philosophy
1.1 What investment philosophy will be adopted to manage our funds?
We adhere to an asset class investment philosophy. This style is contrary to the traditional ‘active management approach’ employed by brokers and most other financial planners whereby individual securities and investment managers are selected to outperform the market.
Since the early 1980s a significant body of academic research has amassed to consistently show that approximately 80% of all fund managers deliver below market performance once the effect of their fees and expenses are taken into account. Furthermore, the top 20% of fund managers vary from year to year. This makes trying to pick next year’s top performers a risky strategy and in our view likely to lead to below par returns.
An asset class strategy aims to deliver the returns from each asset class with minimal costs. If executed correctly it ensures investors are appropriately rewarded for the investment risks they take. The benefits of this approach are broad diversification – you will own approximately 8,000 different companies and assets; reduced volatility; lower risk; lower fees, and enhanced returns.
1.2 What type of investments do you use to build portfolios?
Depending on a client’s risk tolerance, objectives, and time frames, we structure our clients’ portfolios with a differing ratio of debt (cash and fixed interest) to equity (property and shares).
To implement this strategy, a mix of low-cost managed funds are used for most client portfolios.
Other asset classes including Hedge Funds, Commodities, and Private Equity have thus far been rejected based on concerns around liquidity, transparency, costs, and a track record that lacks sufficient length for us to review their performance through different business cycles and understand their behaviour.
1.3 How do you manage fixed interest in terms of credit and maximum exposures?
Cambridge Partners’ fixed interest strategy is designed to:
- Reduce portfolio volatility
- Enhance certainty of income
To help minimise risk within a portfolio it is necessary to diversify within the fixed interest strategy. Different types of fixed interest securities can be used, e.g. bonds, capital notes, fixed interest trusts, etc.
Each type of investment has its own advantages and disadvantages and will perform differently in different market conditions.
Fixed Interest Risk
The returns from fixed interest are determined principally by:
- Term to maturity
- Credit quality – this reflects the financial strength of the organisation or institution that has issued the fixed interest investment
Higher returns are generally associated with longer maturity and lower credit quality.
Additional Guidelines for Pooled Investments
Where fund managers are used they must have a minimum average investment grade rating of A (Standard & Poors) and a maximum exposure to any non-government issuer of 10%.
Unrated investments may be considered subject to being approved by the Trustee and Cambridge Partners investment committee. Maximum exposure to any unrated investments will not exceed 10% of the fund and 3% exposure for any issuer.
Offshore Fixed Interest
We believe it is prudent to have a portion of the portfolio held in offshore fixed interest, principally due to the relative size and lack of liquidity of the New Zealand debt market. When investing in offshore fixed interest we only use funds that are fully hedged to the New Zealand dollar, in order to avoid unnecessary exchange rate risk.
The currency hedge typically provides income that helps neutralise the difference between New Zealand’s relatively high short term interest rates and lower foreign interest rates.
General Guidelines for Investing in Fixed Interest
- Duration should generally be less than five years
- A laddered approach is best applied to ensure that investments mature at different times
- The maximum investment default risk should be limited to 1.5%
- Investments of lower quality (and therefore higher risk) should be limited to 3% of the portfolio
Please note that Cambridge Partners does not engage in tactical asset allocation (sometimes termed “market timing”). We employ a buy and hold approach, and where individual securities (investments) are chosen, Cambridge Partners will select them in an effort to track the overall return of the asset class from which they are selected. We do not necessarily expect to achieve better returns than those provided by the New Zealand debt (fixed interest) market as a whole.
1.4 What structures do you use to minimise tax?
We are very mindful of keeping the ‘tax drag’ on investments to a minimum, and structure investment strategies to reduce tax liabilities. In support of this we have recently established a fixed interest Portfolio Investment Entity (PIE) for our clients, to cap the tax on interest at 28%.
As part of our reporting package, our custodian (AEGIS) provides comprehensive tax reporting for investment portfolios. This consolidated reporting helps to simplify tax return preparation and reduce the cost of administering clients’ financial affairs.
However whilst tax efficiency is an objective it must be balanced with the other priorities of the portfolio, which include diversification, liquidity, expenses, and the adherence to the strategic asset allocation.
1.5 Will you tailor the portfolio to our needs?
All client portfolios are tailored specifically to their personal requirements and circumstances.
2. Reporting and Ongoing Management
2.1 What analysis and reports do you provide for comparing investment performance against appropriate benchmarks, peer groups, and our objectives?
In addition to our regular meetings, Cambridge Partners has an annual meeting with each client to review portfolio performance against the relevant benchmarks. The analysis summarises net returns after tax and fees compared with our peers and the market for the past one, three and five years.
This objective assessment provides comfort for our clients and enables Cambridge Partners to assess the relative performance compared with our peers. We are confident that clients’ investment portfolios will out-perform over the longterm due to our asset class investment philosophy, effective diversification, tax management, lower fees, and lower portfolio volatility.
2.2 What control procedures do you have in place to ensure best execution?
For all direct fixed interest purchases Cambridge Partners will normally approach two sharebroking firms to ensure best pricing. We do the same for equities and set maximum and minimum pricing.
Cambridge Partners also negotiates preferred rates on fixed interest (where possible) based on volume. This is made possible by that fact that our combined offices manage in excess of several hundred million on behalf of our clients, on a fee-only basis.
3. Duty of Care
3.1 How are investment assets protected from theft and embezzlement?
We utilise an investment custodial system owned by the ASB Bank. All cheques and money transfers are paid to the custodian (not to Cambridge Partners) and withdrawals can only be made from the bank account nominated by you.
The custodian also sends a Transaction Summary, directly to you, on a quarterly basis. This summary itemises all portfolio transactions and is sent in addition to the quarterly reports you receive from Cambridge Partners. Furthermore, you are able to access your investment portfolio information online at any time.
3.2 Are there any potential conflicts of interest?
No. Cambridge Partners, as mentioned previously, is only paid by you, the client. This ensures our complete independence and ability to provide unbiased advice.
3.3 Are service agreements and contracts in writing?
Yes. All our clients complete service agreements with both the custodian and Cambridge Partners. These agreements specify the Custodian’s and Cambridge Partners’ obligations and responsibilities to clients.
Furthermore, we draft an Investment Policy Statement tailored to each client’s requirements, which specifies how their investments are to be managed and what our responsibilities are.