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 subpar 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.
A summary of the principles we use when building investment portfolios can be found under the portfolios section of the website.
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 allocation to growth assets (eg shares) and income assets (eg fixed interest).
To implement this strategy, a mix of low-cost managed funds are used for most client portfolios.
We employ a number of filters before selecting investments. These filters mean that certain assets are excluded from our standard portfolios. The asset classes that are excluded include hedge funds, commodities and private equity – based on concerns around liquidity, transparency and costs.
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, eg 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
Fixed interest returns 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.
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 helped establish 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 (FNZ) 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 – including diversification, liquidity, expenses, and adherence to the strategic asset allocation.
1.5 Will you tailor the portfolio to our needs?
Yes. We offer a range of nine standard model portfolios as well as nine standard Socially Responsible Investing (SRI) portfolios that are designed to suit a range of investor needs as part of a Discretionary Investment Management Service (DIMS).
We also offer non-model “bespoke” portfolios that are tailored specifically to a client’s personal requirements and circumstances. Information on our standard and SRI model portfolios can be found in the portfolio page. To find our more about our bespoke portfolios, please speak to one of our advisers.
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 have an annual meeting with each client to review portfolio performance. The analysis summarises net returns after tax and fees, and can include comparison with benchmarks and peers for the past one, three and five years.
2.2 What control procedures do you have in place to ensure best execution?
For direct equity and fixed interest purchases Cambridge Partners accesses wholesale sharebroking rates to ensure best pricing.
Cambridge Partners also negotiates preferred rates (where possible) based on volume. This is made possible by the fact that we manage in excess of several hundred million dollars of assets 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 the FNZ investment custodial system. All cheques and money transfers are paid to the custodian (not to Cambridge Partners) and withdrawals can only be made to the bank account nominated by you.
The custodian also sends a transaction summary directly to you, on a 6-monthly 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 service agreements and contracts in writing?
Yes. All our client service agreements are in writing. These agreements specify the custodian’s and Cambridge Partners’ obligations and responsibilities to clients.
Furthermore, we prepare an investment policy statement tailored to each client’s requirements, which specifies how their investments are to be managed and what our responsibilities are.
4.1 What fees do Cambridge Partners charge clients?
Cambridge Partners charges clients a fee based on the value of the Assets under Management. This fee reduces on a sliding scale for larger portfolios, and the fees specific to your circumstances will be detailed by our advisers as part of the initial discussion.
To further protect client assets and to simplify administration, investment assets are held by FNZ Custodians Limited.
The fee for this service currently starts at 0.18% p.a. for a portfolio of up to $500,000. Again, this fee reduces for larger portfolios. These fees are tax deductible.
4.1 What other fees/costs will I be charged?
Cambridge Partners employs low cost, low turnover institutional funds, most of which are not available to retail investors. The weighted average fund manager fees for the total portfolio are approximately 0.40% gross p.a.
4.2 What is the total cost of delivery for managing our money?
Adviser and custodial fees are charged in accordance with a sliding scale related to portfolio size. Fees accrue at the agreed annual rate and are deducted from the portfolio monthly.
Please note that a minimum annual fee per annum may apply.
The fund manager fees are deducted at the fund manager level and reported to us, also quarterly. Cambridge Partners monitors the total true cost of delivery carefully – as this ensures an enhanced net return for our clients – and all fees will be detailed by your adviser prior to proceeding.
4.3 Do you or your firm receive any commission, fund manager fee rebates, or any other inducements from providers?
Many fixed interest providers and fund managers pay commissions to advisers upon placement of the investment and/or on an ongoing basis. Additionally sharebrokers pay commissions to advisers when shares or fixed interest investments are purchased via them.
Cambridge Partners rebates all commissions, manager fee rebates and any other financial inducements back to our clients at all times. This ensures a transparent process; clients know exactly what fees they are being charged and can rest assured that every recommendation we make is based on what is best for them.
4.4 What performance-based fees are received by any of the investment managers?
Nil. In our view, performance-based management fees primarily reward the investment manager and not the client. Furthermore, they detract from the net performance to the client over the longer term.