Consistently applying a key set of wealth creation principles, limiting distractions, building appropriate and well-diversified portfolios, and maximising the use of available tax effective entities increases the prob- ability of success, giving clients great- er spending confidence. Portfolio construction should focus more on time horizon, risk profile, expected return to meet goals and minimising the risk of a forced sale through defensive assets. Given that markets are always volatile and un- predictable, history tells us that eq- uities should still form the backbone of most portfolios, complemented by solid, liquid, defensive assets. Phillip Gillard is a Principal Wealth Adviser for Shadforth Financial Group, specialising in helping executives and business owners build wealth. He has been listed amongst the Barron’s Top50 and 100 Australian advisers every year since the awards began in 2017.

In reviewing one philosophical avenue to funds management, Merlon Capital Partners CEO Neil Margolis examines the nexus of human behaviour, ESG, and value investing.

I nvesting in undervalued companies, or “val- ue investing”, has staged a comeback in re- cent years, after struggling during the “cheap money” era between the Global Financial Cri- sis and the record monetary and fiscal stimulus during the Covid pandemic. We would argue value investing based on free cash flow has performed well through several market cycles and has displayed low levels of volatility when compared to traditional classi- fications of value such as earnings, book value, and dividends. When value investing was undervalued Value investing struggled during the cheap money era because record-low interest rates facilitated speculation in expensive stocks that had low levels of cash flow, or only the promise of cash flow far into the future. We consider current interest rate settings to be more “normal”, in a wider historical sense – thinking which supports value investing based on free cash flow.

To exploit the outperformance of “value stocks”, an investor needs to understand why it works, which is human behavioural bias that creates the opportunity for stocks to become undervalued. Value investing as a process, not a philosophy All investors need to understand the expecta- tions and concerns already factored into the process of value investing. “A ‘merlon’, in medieval architecture, is the solid part of a crenellated embattlement, the strongest point that protects the defenders.” Such an investment philosophy is clear – we believe people are motivated by short-term out- comes, overemphasise recent information, and are uncomfortable having unpopular views. boHk?si=aj4UKYWARV5liwUw




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