The global financial crisis taught investors a thing or two and spawned a number of trending investment strategies, such as outcome-oriented and multi-asset investing. For one boutique manager, IndexInvest founder Mark Holzworth, the crisis turned on the light for what his advisory firm’s clients now wanted.
Holzworth, a Brisbane-based accountant and advisor, formed IndexInvest in 2009 as a better implementation tool to satisfy post-GFC client needs. He developed a range of strategies, using separately managed accounts (SMAs), from conservative through balanced to growth, plus a couple of higher-octane hedge fund-like strategies, which all use ETFs for the underlying investments coupled with dynamic asset allocation to protect capital and provide a benchmark-unaware return.
“Like any advisory group, we had to field lots of client phone calls [in 2008] about their portfolios,” Holzworth says. “We generally advised them to hold on. But we thought we needed a better outcome for them in the future. We thought this is not the only time we have seen volatility and we are likely to see more volatility in the future. So we needed to have a process which at first protected capital and also provided a good rate of return.”
He had been an early user of ETFs for clients, starting with State Street’s Australian SPYDRs in 2001 and then diversifying into international ETFs with BlackRock’s iShares and more recently BetaShares. But he was aware of the ‘beta trap’, where it is possible investors get caught up in an increasingly overvalued market using traditional market-cap-weighted broad-market ETFs or index funds.
“We developed our own smart beta strategies through the ETFs and index funds in order to enhance returns. We add momentum-driven asset class, country and sector quarterly rebalancing based on themes in which we have the highest conviction,” Holzworth says. “All portfolios have a cash-plus benchmark.”
As more ETFs became available, the manager’s traditional index funds usage phased out and Holzworth uses ETFs exclusively. He says he is agnostic between them and researches about 110 Australian-listed ones, including the synthetics.
The manager has a rules-based technical approach to its dynamic asset allocation. Apart from requiring high conviction to invest at all, it also has ‘stop losses’ If a developed market falls 5 per cent or more in the quarter the manager exits. If a developing market falls 7 per cent or more he exits.
The outcome has been that, for the past six years at least, IndexInvest’s performance has been excellent. The flagship balanced option has returned 11.6 per cent annualized with about half the volatility of the ASX 200.
The two higher-octane ‘satellite’ portfolios, one of which uses leverage, concentrate the sector bets and re-balance monthly. The non-leveraged one has averaged 22.5 per cent annualized over the past three years. The leveraged one was launched only in July last year, trading the manager’s own money.
“Our process tells us that we should always start from an SAA (strategic asset allocation) framework,” Holzwoerh says. “But we don’t believe that SAA has served investors particularly well, particularly during a crisis.”
Deviations from the standard SAA can be quite marked. For instance, IndexInvest has not held any Australian shares in its portfolio for about six months. Tactically, Holzworth also has the capability to short, using the BetaShares ‘Bear’ ETF, and also go to cash for a significant proportion of the portfolio. So he is not going to win any big super fund mandates any time soon but he is not seeking them and doesn’t really care about that. His clients are happy.
This is an interesting difference emerging between the institutional investment world and the real world of members and individual investors since the GFC. The only things that matter in the increasingly retail world of superannuation are capital protected absolute returns. It’s all about outcomes, not traditional benchmarks.
Holzworth’s associated advisory business, which he set up and which provides limited advice to retail investors using direct-access platforms, is True Wealth Management, run by Garry Bradburn. True Wealth is the main, but not only, provider of clients for IndexInvest. Several other advisory firms recommend the manager as either a core or satellite part of their client standard portfolios.
Bradburn manages the direct sales business from the Gold Coast. He says that many clients like the IndexInvest portfolios alongside their property investments, usually through an SMSF. The firm uses the PowerWrap Smart Wrap SMA platform.
IndexInvest uses ETFs for cash-plus benchmark investing