Traditionally, tailored portfolios were known as private share portfolios and were available only to the very wealthy. However, today investors can construct a tailored portfolio across many asset classes and different markets, combining growth, flexibility and better risk oversight at a relatively low cost, writes CHRIS POTGIETER.
Customised to investors’ unique objectives
When investing in a tailored portfolio, clients have full access to a private portfolio manager who is at their disposal should they wish to discuss any aspect of their investments. The transparent nature of a tailored portfolio enables investors to be more informed about the characteristics and performance of the underlying holdings. Fees are typically negotiated on an individual basis and there is a high level of disclosure as a line-by-line disclosure is available for every holding in the portfolio, every transaction and every fee charged. Portfolio reports/statements are typically available online.
Why build unique portfolios?
Investors may seek to personalise their portfolio holdings for various reasons such as building positions in specific growth sectors or diversifying more appropriately. An example may be an investment portfolio comprising a number of unit trusts. While investors may be under the impression that they have a well-diversified investment portfolio, the combined underlying holdings of the unit trusts may have too little offshore exposure or too much concentration in specific sectors or companies. In this instance, the investor’s portfolio may benefit from a restructure to include direct holdings of both local and offshore equities in preferred sectors, together with an appropriate allocation to local fixed income and cash. It would then be better diversified and possibly have lower management fees.
It is also possible to use a tailored portfolio within retirement funds, endowment funds and living annuities. One of the key advantages is that, upon retirement, the tailored portfolio can be transferred to a living annuity from a retirement fund such as an RA or preservation fund, thus avoiding unnecessary trading costs and time out of the market. These ‘in specie’ or ‘script’ transfers are also readily done if a client wishes to transfer a portfolio from one investment manager to another.
Debunking the misconceptions
A key misconception is that tailored share portfolios are riskier and more expensive than alternatives such as unit trusts. However, these can be constructed to carry no more risk than a comparable unit trust. The transparency of a share portfolio, combined with the ability to transact globally and efficiently, means investors are offered a direct route to investment markets. Lower transaction costs and negotiated investment management fees mean potentially lower costs compared to unit trusts, especially for larger investment amounts.
Another criticism is that share portfolios incur excessive capital gains tax (CGT) due to frequent trading. A tailored portfolio is typically not frequently traded, at least not when a professional portfolio manager is involved. These investment portfolios are mostly for the long term and the holdings are selected on this basis. Frequent trading will detract from performance due to costs and unsuccessful attempts at timing the market.
CGT is therefore less of a concern if the portfolio is constructed and managed with a long-term view and even more so if the portfolio is within a beneficial tax wrapper such as a retirement fund or an endowment. In the case of unit trusts, CGT is not incurred until the units are sold by the investor. Ultimately, investors will pay CGT, now or later. One could argue that when paying it now, as in the case of a share portfolio, you are at least sure about the CGT rate. In the future, if you defer the CGT, you cannot be certain about the tax rate that will apply.
A tailored portfolio is an attractive investment alternative for discerning investors. Everybody’s financial needs and goals are unique and a tailored portfolio offers a viable alternative to accommodate this.
For more information, visit Old Mutual online.
About Private Client Securities
Private Client Securities (PCS) is a capability within Old Mutual Wealth, an elite service offering brought to you by several licensed Financial Services Providers in the Old Mutual Group. PCS specialises in bespoke investment management for high net worth investors.
The above content is for information purposes only and does not constitute financial or tax advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any of the above information.
CHRIS POTGIETER is managing director of Old Mutual Wealth Private Client Securities.