Article written by Anthony Edmonds, InvestNow Founder – 30th March 2023

Like builders who never finish the family home, investment professionals often put their own financial affairs on the backburner while happily completing well-crafted solutions for clients.

So what does the inside of a fund manager’s personal portfolio really look like? InvestNow founder, Anthony Edmonds, opens the door on his newly renovated strategy for the big reveal…

Q1: What are the key design features of your investment portfolio?

Simplicity. Efficiency. Diversity. After many years in the investment industry I have come to appreciate the value of these three principles in designing portfolios. Of course, the investment strategy must also match my personal objectives and risk horizon but I aim to keep the portfolio simple (not too many funds or complex assets), efficient (tax- and cost-effective) and highly diversified.

Q2: How do those principles translate to your actual investments?

I recently moved from being a business owner to an investor with most of my wealth now held in a long-term portfolio.

As per the focus on simplicity, just two diversified growth funds represent more than 95% of my portfolio with the remainder split between two managed cash funds. Notably, all those four funds are tax-efficient portfolio investment (PIE) vehicles, fairly priced in terms of the fees I pay, and collectively exposed to more than a thousand underlying securities.

I also have a KiwiSaver account that invests in the same two diversified growth strategies.

Q3: Do you have any immediate liquidity requirements or liabilities?

No. But I would pay down debt (if I had any) before investing. KiwiSaver is the main exception to this rule, reflecting the free money people get from the Government and their employer.

Q4: What is your investment time horizon?

More than 20 years, which means I can take more investment risk with a preference for growth assets like shares.

Q5: How comfortable are you with investment risk?

I’m pretty relaxed about my exposure to investment risk. I understand that growth assets like shares and property will be volatile but over the long term they should outperform ‘safer’ assets like bank term deposits or bonds.

Q6: Are you a hands-on or hands-off investor?

I focus on getting the big decisions right – like ensuring the asset allocation is in synch with my investment horizon and risk profile.

However, I don’t want to spend my energy selecting individual shares or specific investment assets – for a number of reasons.

You need a lot of time, knowledge and technical infrastructure to manage shares or other individual investments successfully… it’s a profession, not a hobby.

While a tiny proportion of retail investors may, through luck or good choices, do well, I believe the majority of individuals can’t manage share portfolios with the skills, efficiency and diversification of professional fund managers.

Aside from the strong odds of underperforming with self-managed share portfolios, individuals who take this route face onerous and time-consuming administration tasks – such as end-of-year tax filing or figuring out real portfolio returns – and run the risk of running foul of IRD rules.

Investing in PIE funds like I do removes all of that hassle.

Simple.

Q7: Do you prefer active or passive investment styles?

I believe both approaches are valid.

For example, one of the growth funds in my portfolio manages equities passively while the other runs shares to an active mandate. But all of the fixed income and cash assets in the funds in my portfolio are actively managed.

In practice, I’m more interested in ensuring the funds I use are well-managed, tax-efficient, cost-effective and provide diversified exposure to the appropriate asset classes.

Q8: Can you name the funds you use?

For obvious reasons, I’d prefer not to say. Although, I can confirm I am a member of the InvestNow KiwiSaver Scheme.

And readers can easily use the InvestNow sorting tools to identify all the diversified growth funds that are both on the wider platform and in the InvestNow KiwiSaver Scheme to easily narrow down which ones might be my choices!

I use the non-KiwiSaver version of the exact same diversified growth funds for the core part of my portfolio.

Similarly, a quick screen of the managed cash PIE funds available on InvestNow will give you some clues about my selections.

Q9: You talk a lot about diversification but isn’t investing in just a few funds undiversified and risky?

Diversification is more important at the investment sectors and underlying securities levels rather than number of managers.

Each of the two diversified growth PIE funds in my portfolio hold more than 1,000 investment assets spread across NZ and global shares and fixed interest assets while one also has exposure to sectors such as property.

I’m not too worried about manager-specific risk (such as the firm going out of business) because all the funds I use are fully regulated under the Financial Markets Conduct Act (FMC).

FMC-regulated PIE funds and KiwiSaver schemes have to use an independent specialist custodian to hold investor assets: even in the unlikely event of a manager business collapsing that would not impact investors.

The FMC rules governing custody in fully regulated funds are far more stringent than in other parts of the market like the wholesale investment sector. Even investment platforms such as InvestNow and Sharesies can manage custody themselves, which does increase firm-specific risk for investors. (Note: InvestNow uses an independent custodian in line with FMC standards.)

In short, I know the funds in my portfolio are well-diversified, properly structured, highly regulated and professionally managed.

Q10: Do you expect to change your portfolio over time?

I established my portfolio as pretty much a set-and-forget arrangement.

Although, I will continue to monitor the funds for any significant changes in the investment strategy, business ownership or key people who run the money. Of course, my risk profile and personal considerations may also evolve, requiring portfolio adjustments eventually.

Otherwise, I am considering making a small investment in private capital funds by gradually reallocating from my managed cash PIE holdings.

Private capital funds do present some challenges.  For instance most are wholesale products and fall outside the regulated universe I prefer. They also tend to be illiquid and lack real diversification.

On the upside, private capital can deliver outsize returns on a risk-weighted basis but I would also manage the risks carefully by limiting exposure to 5% of my total portfolio and spreading any investment across a number of funds.

Q11: What is the most valuable lesson that have you learnt as an investor?

Keep it simple.

Just because an investor has large amounts of capital in play doesn’t mean they need a complicated portfolio with more moving parts than the average.

During my career I have worked with large superannuation schemes, family offices and charities that run perfectly efficient portfolios with just a few well-diversified underlying funds. Typically, such wholesale clients – or the professional investment consultants who advise them – know that nailing the big decisions such as asset allocation and diversification has far more impact on their long-term returns.  They don’t spend time and effort on thinking about the holdings in their NZ shares portfolio because they invest in funds, and get professional managers to do this.

But while those foundational issues are important, investors also need to pay attention to finishing details like tax-leakage (through poorly structured funds), fees and other costs in portfolio construction: simple but effective.