Finding the right mix

At Kilkenny Rose & Associates we have a view that it is not possible to have an effective portfolio construction process without first having clearly articulated an overall investment philosophy.

Our philosophy underpins the approach we take to constructing and maintaining portfolios for clients and dealing with the practical implications of managing money within the day-to-day dynamics of financial markets.

We have a diverse client base typical of a longer standing business. We do have a higher than average group of high-net-worth and ultra high-net-worth clients and provide asset consulting services to companies, corporate super funds and wealthy family groups.

Our approach to portfolio construction is to use strategic asset allocation techniques to build portfolios that have an acceptable probability of meeting a client’s needs and objectives over the medium to longer term. We use a core index and satellite alpha approach in accessing different asset classes. In both domestic and international equities we consider that a tilt towards ‘value’ and ‘small’ will provide a better outcome over time.

For new clients we use FinaMetrica to determine their risk tolerance and use ‘gap’ analysis to deal with any mismatch between the required theoretical portfolio and the level of indicated risk tolerance. It is not a ‘tick-the-box’ process.

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We consider cash flow management central to effective long-term management of portfolios. Cash in or out of portfolios allows cost effective rebalancing. We do not believe in automatic or mechanical rebalancing of portfolios back to strategic benchmarks. We allow a reasonable tolerance around strategic benchmarks in client portfolios as research has indicated that the costs of rebalancing can often exceed the benefit.

We are attracted to alternative asset classes, including private equity if they can truly provide diversification benefits, but it is difficult to get consistent outcomes and access to some of these assets over time, particularly for smaller clients.

We are looking at new indexing/quantitative approaches for domestic and international equities. This includes using fundamental rather than cap-weighted indexes to avoid the classic problem of cap-weighted indexes being overweight expensive stocks and underweight cheap ones, particularly when markets are fully to over-valued.

We try to avoid fads in our clients’ portfolios. When a ‘new’ product or concept is being heavily marketed is precisely the wrong time to invest. We make minimal use of hedge funds in our portfolios as we feel the prevailing evidence indicates they offer little sustainable alpha, particularly after costs. We avoid products that are over engineered and unnecessarily complex. If we can’t adequately explain what is happening within a product structure to our clients we can’t recommend it. We seek to use a combination of direct, index and actively managed approaches in building portfolios to reduce costs and help manage tax outcomes.

Jim Kilkenny

Director

Kilkenny Rose & Associates