How ANZ constructs its model portfolios

November 2016

The ANZ investment methodology has a “built in” portfolio review process.

A strategy for long-term returns and tactics for short-term gains characterise ANZ’s style, writes Eva Diaz.

In this age of globally interconnected markets, investors cannot stay complacent and expect the recent spurt of positive investment performance to continue.

When the Greek debt crisis unfolded from late 2009, it dampened investor sentiment worldwide. There were fears that if Greece left the eurozone, it would create a shock bigger than the global financial crisis.

Closer to home, when the Shanghai sharemarket suffered an 8.48 per cent fall during “Black Monday” in August 24, 2015, it sent other sharemarkets including the US, Britain, Europe and Australia reeling.

These and other global events make it clear investors need to be aware of market developments that may affect their portfolio. Being able to do this is a big enough task, actually understanding how market changes may affect investments makes it much bigger.

ANZ investment philosophy

This is why all but the most astute investor needs advice, preferably from experts with the resources and infrastructure to keep on top of global market events.

The ANZ Wealth chief investment office (CIO) is a team of 80 investment experts. It adheres to an investment philosophy focused on long-term returns while making the most of short-term market opportunities along the way. It’s based on five principles:

  1. The long-term investor will outperform the short-term investor.
  2. Diversification across asset classes is the key to managing return and risk.
  3. Market inefficiencies can present opportunities.
  4. Investment management should be simple and transparent.
  5. Robust governance is critical to efficient portfolio management.

ANZ’s CIO manages investment for long-term gain by actively managing and allocating assets. It finds this to be the most effective way to adjust to market changes and keep investments on track.

But there is also advantage to focusing on the short term. By tactially exploiting short-term market changes, investors can find quick gains. For example, while the sharemarket may show a long-term gain over five or 10 years, there could be periods where share prices fluctuate, which may create opportunity to achieve higher returns.

Strategic asset allocation

“We always start with a long-term view of the markets and consideration of a client’s investment objectives,” says ANZ Wealth portfolio manager Abby Macnish. “There are several key components behind our investment philosophy but it is vital that we start with a big-picture, long-term view of the markets and our clients’ investment goals.”

At the core of ANZ Wealth’s investment philosophy is a strict asset-allocation process, balancing risk and return for investors.

Several things must be considered in the construction of an investment portfolio including an investor’s age, the amount they have to invest and how much time can be committed to grow wealth. For example, a young professional who has just started earning will have different investment objectives to a middle-aged couple looking to retire within 10 years.

Another factor to consider in portfolio construction is the investor’s personality and attitude towards risk. A young professional may be more open to risks to build wealth faster than a middle-aged couple who want to protect their wealth.

After analysing risk tolerance and investment objectives, ANZ’s investment team determines the most appropriate strategic asset allocation for a model portfolio, that is, what percentage of the investment pool will be allocated to which asset class.

Tactical allocation

While the strategic asset allocation determines the long-term direction for the portfolio, tactical asset allocation takes advantage of market opportunities in the short or medium-term.

For example, if there are sectors or asset classes going through massive growth, a certain amount of money may be temporarily allocated to take advantage of that market move. The same is true when a stock or a sector declines in value and there is a need to cut down or to get out of that investment.

“Our ‘market aware’ approach analyses macroeconomic conditions including global growth and overall market direction, which dictates our asset allocation. Then we use tactical measures to make adjustments to the portfolios, if necessary,” says Macnish.

This means the ANZ investment team is actively assessing and monitoring markets and asset valuations to ensure returns are in line with identified investment goals.

Ongoing portfolio reviews

The ANZ investment methodology has a “built in” portfolio review process. This means every portfolio is analysed periodically to ensure it is on target to meet investment goals.

The rigorous review process starts from the macroeconomic level down to asset-specifics where tactical adjustments can be made if necessary. ANZ Wealth engages globally recognised investment professionals including fund managers, research companies, compliance and risk experts to form independent and informed views of global markets.

The team also follows strict governance criteria to ensure portfolio construction and investment recommendations are only implemented after review and assessing the impact on client portfolios.