When investing, there are a lot of influences which impact on the success of our investments but which we cannot control – mainly market returns. Therefore, we need to ensure that the things we can control, such as the cost of the investment and the amount of tax we pay, are managed well. This is not to say we will never sell at a profit to avoid tax or never hire a professional investment manager because of the cost………..we will. But where we do incur an expense for our clients, we will ensure that there is a payback for our clients.
We call the this picture the “circles of control”.
At the centre of circle are the things that Oracle Investment Services can control. This is where we focus on a strategy to help our clients realise their goals. We help our clients stay disciplined & goal focussed by providing an ongoing service offering.
The next layer includes the things that Oracle Investment Services can influence but not control. Here we help our clients identify their goals.
The outside layer represents those things that Oracle Investment Services have no influence or control over. Things like the performance of markets or fund managers, government legislated changes such as a change to tax rates, whether our clients lose their job or inherit a million dollars. We can help plan for these events after they occur.
At Oracle Investment Services, we understand where we add the most value for our clients. We focus strongly on the things we can control including the amount of tax you pay and the costs associated with the advice you receive. We listen to your goals, needs and objectives and provide you with the strategy and ongoing service to help you make financial decisions with confidence and resolve.
Oracle Investment Services Investment Philosophy
Every wealth management firm has their own investment management beliefs. Some firms only believe in investing into direct shares while others believe only in managed funds. Some firms only use passive index managers while other firms use only highly active fund managers. At Oracle Investment Services we don’t have any pre-conceived ideas that restrict what we can and can’t recommend. We place our clients first.
We understand that providing clients with a direct stock exposure has clear transparency benefits and flexibility when managing their tax positions while investing through managed funds gives us access to superior investment professionals. We understand that in some markets passive “index” exposure suits while in other markets active management can add substantial value.
At Oracle Investment Services we tailor individual solutions for every client in recognition of the fact that every client is different and has particular investment needs. However while there is no “one size fits all” investment solution, at Oracle Investment Services we do follow an investment framework and this document aims to explain that framework and inform our clients how we construct their investment portfolios.
Oracle Investment Services Core Satellite investment philosophy brings together the best of the index investment approach and the actively managed investment approach. It involves using index funds as the core of an investors’ portfolio, and selecting actively managed investments or direct shares as the satellites. Investors can benefit from a Core Satellite approach to portfolio construction in terms of lowering overall costs, increasing tax efficiency and more effectively managing risk.
The Core Satellite strategy ensures greater consistency by anchoring a firm base (in the form of the index within a given asset class), and allows an investor to pursue market outperformance (alpha) to complement the base. Since the index return, or beta, is secured, more time can be spent on identifying viable alpha sources.
The Core Satellite approach also exploits well founded research which concludes that the most critical decision affecting portfolio performance is asset allocation, accounting for approximately 70-90 per cent of variations in long term investment returns. Market timing and security selection therefore play a relatively minor role in the overall long term performance of a portfolio. Thus, the decision on how to deploy your capital between asset classes, combined with the Core Satellite approach balances risk, return and cost outcomes.
Under this disciplined approach, index funds provide portfolio’s with a stable core, whilst satellite investments are employed to offer potential outperformance of the broader market – normally in smaller or ‘niche’ sectors.
This approach provides your portfolio with exposure to these higher growth assets, whilst also limiting associated risks.
Using Indexing as the “Core”
With a diversified index fund, investment returns should broadly reflect market performance of the underlying asset class. There is low risk that returns will deviate substantially from the Index benchmark and favourable odds of realising expected returns over time. Simply stated, the return from indexing is market performance minus costs—and the costs of indexing are low.
With active management, the investor is seeking enhanced returns compared to the market in a disciplined fashion, after all costs. Any excess market returns can make a difference to the value of a portfolio when compounded over time.
Incorporating an index fund as the ‘core’ of a portfolio offers the following benefits:
Low costs: Management costs, fund expenses and transaction costs can affect investment returns over time – sometimes by as much as two per cent each year.
Index funds typically have lower management costs due to the lower costs associated with operating an index fund.
Lower transaction costs: Index funds have a low portfolio turnover as they tend to ‘buy and hold’ securities for longer periods to track the index. A lower portfolio turnover results in low ongoing transaction costs. Transaction costs can include brokerage, commissions, stamp duty, custody and other expenses associated with trading securities.
Tax efficiency: The indexing strategy of low portfolio turnover makes the most of CGT concessions by not fully realising capital gains and, therefore, maximising after tax returns.
Diversification: Index funds invest in all or most of the securities in an index. So when you invest in an index fund you are effectively buying the entire market, or a significant portion of it. The overall effect is to moderate the volatility of your portfolio, providing more consistent investment returns over time.
Transparency: Because index funds are designed to track an index and hold the same securities (or a representative sample), index funds are transparent and easy to understand.