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Finding the best for our initial portfolio

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We started in November 2014 with the daunting task of choosing the best from well over 10,000 potential investments available in Australia. After nearly 12 months of exhaustive research we have finalised our initial portfolio of investments for the Affluence Fund.

We created the pool of over 10,000 listed and unlisted investment funds by combining ideas from many different sources.  These included publicly available databases, fund research services, “best of” lists, media and internet searches and, most importantly of all, talking to our many contacts in the industry to discover what was exciting them at that particular point in time.  This, was our first point of difference.  

Most other professional investors and financial planners rely on a much smaller and concentrated pool of investments – their “approved list”.  In our opinion, this approach is flawed because they tend to concentrate on one type of fund structure, thereby severely limiting the depth and breadth of potential investments.

Then we started the task of reducing this list to a manageable number.  This first step was easy.  By simply screening out those funds and managers that did not perform above a fair benchmark over a reasonable period, after all fees, we eliminated nearly 90% of these funds pretty early on.  

We then excluded those investing in asset classes or using strategies we did not believe could meet our benchmark long term return hurdle of inflation plus 5%.  This eliminated close to half of the remainder and left us with just over 500 funds to look at in more detail.  

Our final large cull entailed looking at performance history in more detail – particularly looking at the performance of each fund in down markets and eliminating many which had proven to be under-performers during these periods.

This left us, in early 2015, with just under 300 funds to look at more closely.   We reviewed each of these funds in detail.  We examined factors such as the Fund’s structure, minimum investment, fees, cost of entry/exit, underlying investments, asset allocation, withdrawal provisions and liquidity.  We also looked at the manager, their ownership, stability of the investment team, level of funds under management and the capacity for the types of investment being undertaken.  This allowed us to prioritise approximately 200 funds for serious consideration.  We split these remaining funds into 3 groups:

  • Those with immediate interest, where we scheduled management discussions;
  • Those with significant potential which we continue to monitor closely, and
  • Those with promise, which we continue to revisit regularly.

Each of these groups had roughly an equal number.

The final hurdle was talking to one or more representatives from each fund or manager where we had immediate interest. Many of these people we already knew well and have followed for many years, so this part was easy. Others we were meeting for the first time. We were seeking managers who exhibit as many of our preferred traits as possible. Factors such as significant personal investment in the fund, humility, capacity constraints and conservatism. We would be the first to admit that this part of the exercise is much more art than science. But after more than 15 years visiting with fund managers as a company executive and working in the industry, we feel qualified to make this value judgment.

In the end it comes down to a gut feel – whether we are confident enough to invest ours, and your hard-earned capital with each of them on a long-term basis. And that was the final test we applied.

In reality, almost all of the managers we spoke with could have made our final starting line-up of just over 20 funds. In the end, the decision as to which funds made the portfolio came down to our portfolio construction goals – particularly having sensible diversification.

For example, there are many great small cap funds out there. But it make no sense to have half the portfolio made up of these, because if one falls in value, it is likely many others will as well. So some funds missed the cut for the simple reason that there were too many other great managers in that space.

So who is on the final list?  To view the full list of managers and why we like them, click here. (you must be an Affluence Member to view).

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