investment philosophy - fitzpatricks · investment philosophy, including an explanation of the risk...

INVESTMENTPHILOSOPHY

This document provides an overview of Fitzpatricks Private Wealth’s Investment Philosophy, including an explanation of the

Risk Targeted Approach to investing.

Fitzpatricks Private Wealth is a privately owned national financial advisory group. The firm is focused on aligning investment outcomes with a client’s financial goals.

Fitzpatricks Private Wealth has a number of core investment beliefs.

The primary belief is that recommended investments suit the requirements of the client and align with their needs.

Diversification of assets and outsourcing to active and professional investment managers adds value over time.

Understanding risk is an often overlooked part of the investment equation. We believe that targeting returns after agreeing an appropriate “risk budget” helps protect against unexpected market volatility. While most clients target high returns when the market is rising, many would rather invest in a solution that provided some downside protection when the market corrects, even if that comes at a cost to returns during rising markets.

A Risk Targeted Approach (RTA) is an evolved approach to investing that focuses on the level of risk that needs to be undertaken to achieve a desired return outcome, with diversification of risks to achieve a more consistent return outcome.

INVESTMENTPHILOSOPHY

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FITZPATRICKS HAS A STRONG HISTORY OF RECOMMENDING INVESTMENT SOLUTIONS DESIGNED TO SPECIFICALLY MEET THE NEEDS OF OUR CLIENTS USING EXPERTS IN THIS FIELD

Fitzpatricks Private Wealth 2

This document provides an overview of Fitzpatricks Private Wealth’s investment philosophy, including an explanation of the Risk Targeted Approach to investing.

The marketplace contains literally thousands of investment choices.

Fitzpatricks Private Wealth advisers can select from a large range of approved investments and product administration solutions. Our highly skilled advisers will tailor their specific investment approach and any relevant product advice in line with the specific circumstances, needs and objectives of our clients. Although Fitzpatricks Private Wealth has a strong belief in the Risk Targeted Investment Approach, if this approach does not appeal or does not meet the needs and objectives of the investor, other advice and / or investment approaches can and will be used.

Fitzpatricks has a strong history of recommending product solutions designed to specifically meet the needs of our clients using experts in this field. Our evolution through Managed Accounts over 17 years has confirmed the fundamental value of a close working relationship between our investment experts and our advisers. Fitzpatricks' original Managed Accounts were developed to provide a high level of investment expertise and allow advisers to outsource investment management to experts, in-line with our investment philosophy and beliefs. Further strengthening of the investment capability lead to the creation of Atrium Investment Management, an institutional quality investment manager who specialises in the ‘Risk Targeted Approach’ to investing.

For this reason, if a risk targeted investment approach is appropriate, this may be implemented by Atrium Investment Management Pty Ltd (Atrium). Atrium and Fitzpatricks are 100% privately owned and have common ownership.

The information set out below has been prepared as a guide to understanding investment principles and concepts in general and is not to be taken as personal financial advice. You should consult a qualified financial adviser to consider whether this information is appropriate having regard to your objectives, financial situation and needs before making any decision regarding a financial product or strategy.

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AIM TO PRESERVE CAPITAL

MAINTAIN RISK WITHIN TARGETED LEVELS

SEEK TO ACHIEVE CONSISTENT POSITIVE RETURN OUTCOMES

INVESTMENT APPROACH

AN OVERVIEW OF THE RISK TARGETED

The Risk Targeted Approach to investing focuses on the level of risk that needs to be undertaken to achieve a desired return outcome.

4 Fitzpatricks Private Wealth

At Fitzpatricks Private Wealth, our advisers will spend time understanding the client's tolerances for risk and return. Different investment styles may be discussed to highlight their different attributes.

If the adviser determines that the Risk Targeted Approach is appropriate for the client, then an investment solution that is determined to be in the client's best interest will be recommended.

INVESTMENT APPROACH

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Professional, active management of direct Australian equities, and factor in the extent of any required portfolio transparency;

Preferences to investment approach, including strategic asset allocation, objective based investment concepts, asset liability matching and risk targeted investment portfolios;

Comprehensive and efficient solutions for management of portfolio cash and fixed interest requirements; with the objective of sensible solutions to meet liquidity and living needs;

Options for investment structure including pooled managed funds, Separately Managed Accounts (SMAs) and Exchange Traded Funds (ETFs); and

Access to an extensive range of diversified and specialist investment choices across all asset classes, using both active and passive (or index) investment styles;

Appropriate selection of an investment administration solution (platform or wrap account) which aligns with your personal preferences and investment portfolio needs. These investment administration structures provide efficient ongoing administration of your investments and simplified consolidated reporting. Fitzpatricks advisers can access a wide range of platforms and wrap investment administration solutions.

Fitzpatricks will always provide advice which meets the personal and financial needs and objectives of the client. A Risk Targeted Approach may suit some clients who seek to achieve a more consistent return outcome.

The most important facet of the Risk Targeted Approach is the management of volatility in portfolios to achieve compound returns for clients over time. Fitzpatricks believe compounding is the essence of investing over both the short and long term horizon for all investors.


INVESTINGRISK TARGETED

AIM TO PRESERVE CAPITALFitzpatricks believes the first requirement of achieving optimal long term investment outcomes is to aim to preserve capital by minimising capital loss. It is important to note this is an aim only and we cannot guarantee your account balance or any particular income or return outcomes.

Preserving capital is of central importance in generating long term wealth. While many industry participants speak of this as a core requirement, we believe that very few portfolios are structured in a manner that allows for this to truly occur. Unfortunately this became all too evident during the global financial crisis.

Fitzpatricks Risk Targeted philosophy is based on the following tenets:


FOCUS FIRST ON RISK (NOT RETURNS)


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RISK TARGETED

1 32Quality and depth

of the investment research process (whether the process is focused on direct assets, selecting external fund managers or counter-parties for alternative and cash investments).

Ensuring the portfolio is not excessively exposed to any single risk (for example; market, political, regulatory or counterparty risk).

Seeking to allocate only to investments which when assessed independently, are considered strong investment opportunities and that, when combined, collectively provide a strong level of diversification.

A key benefit of preserving capital is the long term impact on wealth creation that results from compounding positive returns. By minimising capital losses, a portfolio does not need to have the highest returns in bull or positive markets, but should still provide solid returns over the medium to long term. This is illustrated in the historical performance (see ‘Performance Track Record’ below, page 13) for the Fitzpatricks Managed Discretionary Account (MDA).

The Risk Targeted Investment Approach aims to preserve capital through the following:


The central tenet of the Risk Targeted Approach is to establish a client portfolio’s risk budget. Once established, the objective is to then seek to maximise returns within this budget. Risk budgets relate to the expected volatility of a portfolio. Volatility is simply a measure of the extent to which an investment is expected to deviate from the expected average return. This is illustrated in the following graph.

Please note the estimated return and risk calculations have been created using benchmark strategic asset allocation portfolio asset allocations and the asset class forecasts current as at July 2019. Actual returns will vary from these figures based on the underlying investments selected and portfolio composition. The estimated returns shown above are prior to fees being charged. They are a guide only and we do not provide any guarantee of future performance, and past performance is not a reliable indicator of future performance. The data provided has been based on long term forecasts and is updated annually.




Estimated Range of Returns of $1,000,000 Invested Over 1 Year

Po

rtfo

lio V

alue

Estimated Range of Returns for 95% Probability

$1,084,000

$1,128,0000

$1,176,000$1,225,000

$1,274,000

$1,078,000

$882,000

$1,069,000

$913,000

$1,060,000

$944,000

$1,042,000

$1,000,000

$1,300,000

$1,250,000

$1,150,000

Average Estimated Return

$1,100,000

$1,050,000

$1,000,000

$950,000

$900,000

$850,000

$800,000

Conservative ModeratelyConservative

Balanced

Risk Profiles

Growth High Growth

$1,052,0000

$976,000


Source: Fitzpatricks Private Wealth

MorningstarMultisector Balanced

0%

25%

20%

15%

10%

5%

Risk TargetedBalanced Strategy

S&P/ASX 200Accumulation Index

Fitzpatricks Risk Targeted Balanced Strategy Vs Benchmark Volatility - Rolling 3 year

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020

September 30

7% volatility target limit for Risk Targeted Balanced

A MEASURE OF RISK INHERENT IN PORTFOLIOS

THE FOLLOWING GRAPH ILLUSTRATES HOW RISK BUDGETS AND RETURN OUTCOMES HAVE BEEN ACHIEVED IN PRACTICE. THIS GRAPH DEPICTS THE VOLATILITY OF 3 DIFFERENT INVESTMENTS:

AUSTRALIAN SHARE MARKET

INDUSTRY BENCHMARK

Which is an indicator of industry norms for diversified Balanced portfolios.

FITZPATRICKS RISK TARGETED BALANCED PORTFOLIO

As illustrated by the graph, the industry benchmark is heavily influenced by its exposure to the risk inherent in equity markets. The industry benchmark (grey line) experienced an increase in volatility during the period of the GFC (2008/2009) and for the period after the GFC. In other words, as the market risk increased, so did the risk of most investors’ portfolios, even if they were diversified and “balanced”. In contrast, the Fitzpatricks Risk Targeted Balanced strategy employed over that time maintained a more consistent risk level over time.

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Source: Fitzpatricks Private Wealth, Morningstar, Data since inception, as at September 2019.Past performance is not a reliable indicator of future performance.



A risk targeted portfolio is constructed so that it does not passively take on excessive risk, such as that experienced in equity markets. This should generate portfolio returns which are more consistent over time despite the fluctuations of market cycles. The power of constant compound returns is the essence of the Risk Targeted Investment Approach.

This is illustrated in the following diagram which depicts the Fitzpatricks Risk Targeted Investment Approach return profile, relative to the more common market related industry approach.

Please note we cannot guarantee consistent positive returns to clients. However if we can be successful in achieving a consistent risk level, it can limit the potential for large external shocks which can result in material losses of capital for clients. This means a portfolio may not fully benefit from market upswings but should also not be as significantly affected when markets fall.




Port

folio

val

ue

Investment timeframe in years

Risk Targeted ApproachIndustry Approach

ILLUSTRATIVE PORTFOLIO VOLATILITYILLUSTRATIVE PORTFOLIO VOLATILITY

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A number of these factors relate specifically to the industry’s focus on making set allocations to individual investments and then reviewing these infrequently (the industry refers to this process as Strategic Asset Allocation or SAA). However, in contrast, investment markets are dynamic and constantly provide different opportunities as well as new threats. Short comings of SAA include:

While the initial allocation to investments would take into account a broader understanding of the risk and return of individual investments, unfortunately the allocations to these investments

are reviewed only periodically. Given the risks associated with individual investments are not constant over time, this may result in portfolios greatly exceeding the level of risk originally agreed upon.

The following chart illustrates the change in the level of volatility (a measure of risk) in the Australian Share Market including the global financial crisis (GFC) of 2007 to 2009.

Source: IRESS, data from 31 December 2004 to 30 September 2019.

INVESTMENTAPPROACHES

LIMITATIONS OF COMMON

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

S&P/ASX 200 Index Implied Volatility Chart

Volatility peaked above 50%

Historical average of approx. 14%

0

60

50

40

30

20

10

April 1st

1RISK IS NOT CONSTANT


Many SAA investors rely on equity market exposure to obtain the majority of their investment returns. Equity investments are generally considered to be one of the highest risk investment opportunities available.

The pre-established allocations to different types of investments can result in investment into overpriced assets. An excellent example was Listed Property Trusts during and after the Global Financial Crisis. While many industry participants foresaw this, very few had the ability to take action and sell these investments, given their mandate required them to have a set allocation to this asset class. The same can be said of the typical portfolio which forces managers to invest predominantly into equity markets regardless of the current underlying risks or stage of the market cycle.

Similarly, the reverse is that with a set allocation to individual investments, there may be limits to the amount that can be invested into certain types of assets. This is best illustrated with ‘alternative’ investments such as commodities or infrastructure which do not fit neatly into a pre-determined class. As a result, there is a limit placed on the amount allocated to these investments irrespective of their individual attractiveness.

One of the biggest revelations of the GFC was just how correlated markets in different asset classes are and that ‘diversifying’ into different asset classes can provide little protection when volatility in one asset class can spread to other asset classes. A clear example was how a major fall in US property values impacted virtually all other asset classes internationally.

By contrast, the Risk Targeted Investment Approach preferred by Fitzpatricks, results in portfolios which are managed across a range of different underlying investment types (or asset classes). Asset classes may include traditional investments such as equities and bonds (fixed interest) as well as ‘new’ asset classes such as infrastructure, commodities and alternative investments. A key difference though, is that there is no predetermined allocation to particular asset classes. The investment manager can choose to invest where they believe the risks and opportunities are at any particular time.

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45HIGHER RETURNS

COME WITH GREATER RISK

INVESTING IN OVERPRICED INVESTMENTS

UNDER-INVESTING IN CHEAP ASSETS

CORRELATION

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Fitzpatricks established a Managed Discretionary Account (MDA) in 2002. Initially a traditional Strategic Asset Allocation approach was used for the MDA, however concerns over market volatility and an “asset price bubble” in the lead up to the GFC, resulted in a review of the MDA investment approach in 2006. At this stage, Fitzpatricks refined its preferred investment methodology to specifically ensure that a client’s portfolio was more focused on the level of risk being taken and seeking to provide a more consistent return outcome. This was considered a sensible solution to overcome many of the shortcomings of prevailing industry approaches as

outlined above. This Risk Targeted Investment Approach for portfolios was implemented in 2007.

In 2019, Fitzpatricks closed its MDA and transferred client accounts and underlying investments to a Separately Managed Account (SMA) product structure on the HUB24 investment platform. This strategic decision was made due to technological and regulatory developments, with the outcome for clients being significantly improved on-line reporting functionality, similar or lower total fees, and the investments being managed in an equivalent Risk Targeted Approach. Our fundamental approach to investment has not changed even

though the delivery of this has evolved over time.

The following chart illustrates the benefits of the Risk Targeted Investment Approach during the Global Financial Crisis of 2007–2009 and continuing through to 2019. While the portfolio still suffered the impact of the Global Financial Crisis, the retention of capital value has allowed clients in the diversified portfolio options in the Fitzpatricks MDA to generate extremely strong returns over the longer term. Similarly, the difference in investment returns between the market and the Fitzpatricks portfolio is evident.

As outlined in the volatility graph on page 7, while the market returns were negative through 2008, the benchmark portfolio volatility also increased markedly. This is in contrast to the level of risk taken by the Fitzpatricks portfolio through this period which was relatively constant.

PERFORMANCE TRACK

RECORD

$950

$5,450

$4,950

$4,450

$3,950

$3,450

$2,950

$2,450

$1,950

$1,450

Sep 02

Apr 03

Nov 03

Jun 0

4

Jan 0

5

Aug 05

Mar

06

Oct 06

May

07

Dec 07Ju

l 08

Feb 09

Sep 09

Apr 10

Nov 10

Jun-

11

Jan 1

2

Aug 12

Mar

13

Oct 13

May

14

Dec 14Ju

l 15

Feb 16

Sep 16

Apr 17

Nov 17

Jun 1

8

Jan 1

9

Aug 19

Risk TargetedBalanced Strategy

S&P/ASX 200Accumulation Index

MorningstarMultisector Balanced

Risk Targeted Balanced Portfolio - Since Inception 30/09/2002 to 30/09/2019

Source: Fitzpatricks Private Wealth, Iress. Value of $1,000 invested at inception, Performance since 30 September 2002 as at 30 September 2019. Past performance is not a reliable indicator of future performance.


Fitzpatricks has been at the forefront of developing investment portfolio solutions and strategic financial advice, including risk targeted diversified portfolios across asset classes and specific asset class mandates such as Australian equities, alternatives, private markets and fixed income. This robust framework has served the clients of Fitzpatricks extremely well since inception.

This success gave rise to the formation of an affiliated company called Atrium Investment Management Pty Ltd (ABN 17 137 088 745, AFSL 338 634) to satisfy client and adviser demand for the Risk Targeted Investment Approach. Atrium and Fitzpatricks are 100% privately owned and have common ownership. Atrium’s Investment Team provides active investment and portfolio management services aligned to a Risk Targeted Investment Approach.

Fitzpatricks commenced a Managed Account Service offer in 2002, and is one of the longest continuously serving managed account operators in Australia. Fitzpatricks, via a related entity Atrium, continue to offer Managed Account solutions to clients. A Managed Account provides efficient investment implementation of a professionally managed portfolio with a level

of tailoring and transparency to the investor. However a managed account will not be suitable or required in all cases. Hence a variety of other investment administration structures and investment approaches are also able to be used by Fitzpatricks Private Wealth advisers to meet the needs of clients.

ACCOUNTS

INVESTMENTSOLUTIONS

FITZPATRICKS AND MANAGED

HISTORY OF PROVIDING

IMPORTANT INFORMATION

The information in this document (Information) is provided by Fitzpatricks Private Wealth Pty Ltd (ABN 33 093 667 595, AFSL 247 429) (Fitzpatricks), and where relevant, its related bodies corporate. Unless otherwise stated, the Information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the Information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the Information. Past performance is not a reliable indicator of future performance. Future performance and return of capital is not guaranteed.

Performance figures relate to the model portfolios offered by Fitzpatricks, with investment management implemented by underlying investment managers selected by Fitzpatricks. The details of each model portfolio may change and you should keep this fluidity in mind when considering figures. Actual performance will differ among

clients depending on the timing of their investment, the ability of an investor to nominate stocks they do or do not wish to hold and the level of variation from the models. Figures are post portfolio management fees and expenses and assume reinvestment of distributions. They do not take into account inflation or tax or adviser fees.

While every care has been taken in the preparation of the Information, Atrium makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This document contains projections, forecasts, targeted returns, illustrative returns, estimates, objectives, beliefs, back-testing, hypothetical returns, simulated results, non-actual and similar information (Non Actual Information). Non Actual Information is predictive in character, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, and may differ materially from results ultimately achieved. Non Actual Information involves subjective judgment and analysis, the use of historical long term data and most recently available data obtainable from independent sources, and is

subject to assumptions that Atrium management believe to be reasonable, but that can be inherently uncertain and unpredictable. Non Actual Information is provided for illustrative purposes only and is not intended to serve as, and must not be relied upon as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. Some important factors that could cause actual results to differ materially from those in any Non Actual Information include changes in domestic and foreign business, market, financial, political and legal conditions, and incorrect data provision by external sources. There can be no assurance that any particular Non Actual Information will be realised.

Where any portfolios are referred to, the information shown may not reflect the actual composition and historical data for the portfolio but is intended to be illustrative only. For this reason, the figures shown may differ to the information presented in portfolio and fund reports.

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SOLUTIONS

Fitzpatricks Private Wealth Pty Ltd

ABN 33 093 667 595Australian Financial Services License No. 247 429 www.fitz.com.au

FTZ196 11/19

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