Last week, I conducted a one-off portfolio review for a client, a highly experienced and accomplished self-directed investor.
Despite their expertise, they wanted a fresh independent set of eyes to identify any blind spots and challenge their assumptions.
This kind of portfolio analysis is one of my favourite parts of the job.
When I reviewed their portfolio, this client had played the technology theme far better than most. They preferred a mix of ETFs, direct shares and managed funds.
But I quickly noticed that three of their investments, an index ETF and two supposedly “active” managed funds, were in reality almost identical.
When I ran the correlations, they were absurdly close to 1.
A quick look at the underlying holdings confirmed what the numbers were telling me. They were essentially the same portfolio.
And that is a problem.
One of the biggest mistakes investors can make is thinking they are diversified when they are not.
Different fund names, different managers and different wrappers can create the illusion of diversification.
But if the underlying holdings and behaviour are almost identical, you are not really spreading risk. You are just owning the same thing multiple times.
Nothing frustrates me more than paying active management fees for what is essentially index performance.
In this case, the fees on the active funds were chunky, above 1.2%, with one even charging a relative performance fee.
And as my teenage daughter would say, nothing gives me the ick quite like a relative performance fee, where you end up paying a fee when an active manager loses you money, just because they lost you less than the index.
That is not my favourite genre of investing.
The upshot was straightforward.
These so-called active funds were not adding meaningful value. They were simply mirroring the index at a much higher cost.
My recommendation was simple:
If the client wanted to keep that exposure, consolidate it into a single index ETF.
That would:
Sometimes the best investment improvement is not adding something new.
It is removing duplication.
One of the reasons I enjoy this work so much is that it is very easy to become attached to your portfolio.
Even highly capable investors can develop blind spots.
A fresh, independent perspective can help you:
And that can be incredibly valuable.
If you would like an experienced, independent review of your portfolio to identify overlaps, hidden risks and unnecessary fees, you can learn more about how I work with clients here.
Kind regards,
Shelley Marsh
Outsourced Chief Investment Officer (OCIO) & Founder
Wealth Differently
General Advice Warning: Wealth Differently holds an Australian Financial Services licence to provide services to wholesale clients only. The information on this website is only for persons who are wholesale clients as per s761G of the Corporations Act. The information includes general advice which does not consider your particular circumstances and you should seek advice from Wealth Differently who can consider if the strategies and products are right for you. You should also understand that past performance is often not a reliable indicator of future performance and should not be solely relied upon to make investment decisions.
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