By William Offen
Watching an interview with Laurie Mcllwee, CFO of Tesco on Bloomberg this morning, I was reminded again of the importance of managing our asset base correctly.
This may be obvious, but for reasons that will become apparent later, I believe this is something which so many of us need to look at in more detail.
Tesco have decided to pull out of the USA and part of the reasoning given was “there are so many opportunities around the world to invest in … better opportunities that will give us a quicker and better return.”
Now, I know we are talking about an international company with a multi billion pound turnover and I am sure that most of us will feel our financial planning is vastly different from Tesco’s, but the general concepts are the same; the right place, time and mix of assets is imperative for long term success.
A simple start point easily missed
There are of course some major differences between a corporation like Tesco and an individual (apart from the amounts involved of course), not least are the levels of detail involved and the expertise that can be employed or utilised.
For example, how many of us absolutely define our asset base to determine its essentials, like content, performance, holding cost, liquidity, flexibility, risk, etc. and the correlation of those essentials?
In my experience, most individual investors concentrate mostly, if not exclusively, on risk and return, two vital elements of course in any investment plan; there are however several other vital areas we should be considering.
I have written previously about achieving a balanced performance from an asset base, the first couple of steps of which are that we need to determine a) exactly what our asset base consists of and b) what each of those assets should be doing for us.
The first step, a) should be simple, but the challenge often is determining what actually constitutes an asset in terms of investment possibilities, and it is this that I want to concentrate on for this article.
Assets – what, when, why and how?
My overall point here is not that it is difficult to identify what constitutes an asset – that of course is obvious – it’s more how we use it, abuse it, or indeed ignore it, as part of our portfolio planning.
To illustrate my point, I will consider one single asset, one that most have and one which most ignore in planning terms: Money!
Money is simply an asset class, which means that it must be compared with other assets in a portfolio for its rightful place. Many people don’t consider money in a bank as part of their investment portfolio when in reality it is a large part, paradoxically more so when it is ignored as such.
There are of course opportunities to be had in actually trading money – like any other tradable commodity. I am, however, more concerned here with a financial plan for our long-term security and wellbeing, not the ups and downs and risks of daily and short-term trading.
Take this example: John P has £100,000 invested in stocks and shares and he has bank deposits of £60,000. He considers only that his investment portfolio is the £100 000 when in reality his overall holdings are £160,000 with only the £100,000 actively working. If he is achieving say 10% on his £100,000, he is actually only achieving 6.25 of his whole portfolio.
Put another way, if he were to get his entire portfolio performing at the same level he would gain an extra £6,000 – an uplift of 60%! Obviously there needs to be consideration for liquidity etc, which would reduce the £60,000 but even reducing the amounts the point is made.
Could his portfolio be better managed? Without doubt!
Bank accounts have a place in our plans
Most client appraisals I undertake uncover a complete lack of planning for cash/active investment separation and therefore illustrate an underperforming portfolio, with the resulting lower returns.
In my opinion, a bank should only be used to hold liquidity requirements, that is to say, cash that is needed for day to day use and payments of bills etc.
Holdings should be no more than is required for a maximum term of say six months, i.e. an amount that would ensure all outgoings are covered for six months in the event of a break in incomings. The remainder should be added to the actively invested part of the portfolio and achieve the higher returns.
Cash in a bank will most likely perform lower than inflation so it must be controlled if we wish to maximise the return on our portfolio.
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William Offen is Blacktower Financial Management (International) Country Manager, Portugal
