Posted 28.03.2020 in Industry Updates
Effective Wednesday evening, Covid-19 government updates meant we closed our offices and have moved to a remote workplace model.
As I write this, I am acutely aware that you have a lot on your mind and with that I will be as brief as possible, and hopefully useful. We would really like your feedback and questions so please let us know what you think, (and letting us know anything you need), by contacting us here.
During the week we have seen Covid-19 close-up, as the impacts are seen in our communities and closer to home. As our local cafes and restaurants close, we all know people whose livelihoods are being impacted.
I had expected for us all to be in a complete lock-down by now, so ahead of that we moved the business to a full work-from-home remote model. More on this later.
Over the past few days global markets have gained a steadier footing as governments unleashed enormous stimulus to support those losing their jobs and to support credit markets. This coordinated support is critical in cushioning the impact of the C-19 economic shock.
This is truly unprecedented intervention designed to stabilise the markets. While Australia is a minnow in world-market terms, our Reserve Bank has done a superb job in stabilising credit markets so that the banking and financial systems function normally.
Question 1 – How safe are my defensive (fixed income) assets?
As we are speaking with clients, we remain impressed with the relative calm you are displaying in what are very challenging circumstances. One question asked during the week was: how safe are my defensive assets? This is a really important question in these times and we thought a broader audience might appreciate the answer.
When we invest in shares it is reasonable to expect a higher return than cash and bonds, and historically that higher expected return has averaged about 6% per annum above the cash rate. That’s a big premium, but with the reward comes the risk of significant volatility – pretty regularly as it turns out!
While our portfolios are designed to capture this higher return, we also protect your wealth by ensuring investors have an allocation of fixed income (bonds) and cash to buffer the portfolio during periods of volatility. We call cash and bonds ‘defensive assets’ because you can rely on them when other parts of the portfolio are stressed.
Building the secure part of the portfolio
For clients in retirement, (or transitioning to retirement), the security of the defensive portfolio is critical. You need it to be there during share market stress, to draw down on during the time it takes for share markets to recover.
Your security in these investments comes from three things:
Liquidity of the underlying investments – (Will you be able to get the money when you need to?)
Diversification – (If an underlying bond in the fund falters, how will it impact you?)
Credit Risk – (What is the likelihood you will get your capital back?)
Let’s deal with each of these in turn.
We limit our clients’ investments in fixed income to a small number of very high-quality funds. This focus enables us to monitor events very closely and to have one-on-one discussions with the managers.
The liquidity of the funds is very high, particularly for those clients whose lifestyles may depend on them. Using the Dimensional Two-Year and Five-Year Diversified Fixed Interest funds as examples, the average period to maturity of the bonds held is 0.61 years and 2.01 years respectively. While this ‘duration’ is intended to provide some additional return over cash, it does not impact the liquidity of the funds.
At present our investment committee is in constant contact with the fund managers, confirming that the markets for these bonds continue to function normally.
For diversification, Dimensional places limits on their funds in respect of issuers, economies and across issuer types. This means there can never be an over exposure to a particular security, economy or sector. In the unlikely event of a default for one of the issuers, the impact on investors is very limited. In the table below we summarise the number of securities in each of the funds.
Finally, the credit quality of a bond issuer is at the heart of the investment’s security. The better the credit rating, the more secure the bond. As an example, the Australian Government has a AAA rating, while Commonwealth Bank is rated AA- or Aa3; while Wesfarmers is rated A-minus. This will help give context to the credit ratings in the table below.
That said, Dimensional does not solely rely on credit rating agencies. Every moment of the trading day sees the bond market continually assessing the credit worthiness of every security and giving it an implied credit rating. This means that if a AA rated bond is trading as a BBB bond, Dimensional will use the implied rating. This provides investors with an additional layer of credit security.
In summary the credit quality, diversification and liquidity of these investments provide us with real confidence that they will continue to provide the security they were designed for.
Question 2 – Will my life insurance products pay out for Covid-19 claims?
This question was posed during the week by more than one of our younger clients, and just the fact that it was asked provides an insight into the level of concern people are feeling.
Let’s hope it never comes to a claim, but there is a simple answer to this one – yes, any insurance policy arranged through Capital Partners will honour genuine claims for Covid-19 related health diagnoses.
It’s important to note that income protection will pay out due to a sickness or an accident, but not for loss of employment. If you have a specific question about your circumstances, please speak with one of our insurance specialists, Serena West or Luke Towers.
Question 3 – We rely heavily on Capital Partners – will you be OK?
Another great question and we are grateful for the concern you show for our team and their families.
While our physical office is now closed, we are operating normally via a virtual office. All team members are working from home and have full functionality of resources. We are meeting all clients via video conference and to date this has been very satisfactory.
To the greatest extent possible it is business as usual for us and I encourage you to call the office (6163 6100), if you need anything. If you call any of our direct office numbers, they will divert to the team member’s personal mobile phone.
Our Financial Security – most of our clients will know that we are a very conservatively run firm. We always carry provisions for difficult economic conditions and as such we have a very secure balance sheet and no debt. Our priority is to retain all team members and continue services on an ongoing basis.
Suppliers – we have always taken great care to partner with suppliers we can rely on, particularly when client investments and insurers are concerned. Our key suppliers, Macquarie Bank, Dimensional Fund Advisers and Vanguard, along with the major insurers, have sophisticated business continuity plans in place. We have every confidence in these relationships.
Cyber-security – after our cyber scare over 12 months ago we invested very heavily in systems, security and system monitoring. All Capital Partners’ computers and devices are monitored for cyber risks 24/7. All remote communications for sensitive client information are conducted over an encrypted private network.
I said I’d be brief – sorry about that. Please give me feedback on our communications, we really do want to be relevant during these difficult times. All advisers are available to assist in any way we can. If you have a family member going through financial difficulties and you feel we may be able to help, please let us know.
In the meantime, stay safe. Read of next update here.