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Podcast Transcript

Episode 59, Season 1

Understanding goals based investment, with Jody Fitzgerald


Intro: 00:00 This episode was recorded live at United, the 2019 AFA conference in Adelaide. The Association of Financial Advisors is the association of choice for financial advice professionals, and it powers them to transform the lives of Australians through quality financial advice. For more information, check out afa.asn.au.

Hello and welcome to the goals-based advice podcast where we have conversations with pioneers of the new world of financial advice. I’m your host, Fraser Jack. I want to thank you so much, for tuning in today. Today we’re coming to you live broadcasting from the AFA conference here in Adelaide. It’s a fantastic venue and it has been a great couple of days so far, day two. I’m very lucky to be joined by Jody Fitzgerald. Welcome.

Jody Fitzgerald: 00:48 Thank you.

Fraser Jack: 00:49 Do you want to give the listeners a quick overview of yourself and what you’re doing?

Jody Fitzgerald: 00:51 Who I am? Yeah, sure. So I am the head of institutional portfolio management at Morningstar Investment Management. So a lot of your listeners might know Morningstar for ratings and equity research and data. They probably may not know that we actually have an asset management business. And that’s where I sit. So I manage multi-asset portfolios for our clients, which includes institutions and advisors.

Fraser Jack: 01:15 Fantastic. And how did you become that journey? That sounds like a...

Jody Fitzgerald: 01:20 I’d like to claim it was well planned and thought out and, but it’s just one of those happy accidents in life, is which I think is sometimes the best laid plans. Right?

Fraser Jack: 01:30 That’s pretty much the answer that everyone gives to this. I fell into it. It was an accident and it was just something that happened.

Jody Fitzgerald: 01:37 Yeah. I think in your career, the best advice I’d give anyone who’s young is just getting there and try something. If you don’t like it be very tactical and move around. And every job gives you insights into who you are and who you’re not. And I guess as you grow up, although I’m still waiting to grow up-

Fraser Jack: 01:53 Me too.

Jody Fitzgerald: 01:54 ... You’ll eventually work out what suits you and what doesn’t. And for me, I’ve always had a passion for economics and markets. And my ultimate passion is, because I grew up a country girl, coal mining town, is I fundamentally think everybody deserves a good retirement. And that’s my why, is that I do this because I want to see people reach and attain their financial goals. And I think that should be true of anybody, irrespective of where you start your life journey.

Fraser Jack: 02:24 Fantastic. Now this is the goals-based advice podcast. We love to talk about goals and focus on goals. And I thought we might talk to you today a little bit about goals-based investing.

Jody Fitzgerald: 02:33 Yeah.

Fraser Jack: 02:34 If that’s all right?

Jody Fitzgerald: 02:34 Yeah. Perfect. So I mean, goals-based advice is a really fantastic weighting trait with your clients because it makes financial advice approachable to everybody, irrespective of your understanding of investments in markets. Everybody understands I have a goal to in retirement, be able to afford my lifestyle. Pretty simple, set some goals around that. And one of the real advantages of getting a financial advisor is to assist you with the cashflow management, the savings, the things that you need to do to achieve those goals. However, sometimes on that journey, there is sort of a lack of recognition, I guess, that what’s really important is that if you are a goals-based advisor, you really need to make sure you’re a goals-based investor as well. It needs to align with what you’re trying to achieve.

  Now advisers are great at understanding financial markets, they understand, how asset classes will perform in certain economic environments, et cetera, what the risk of that asset class would be over time. But basically the journey that usually happens when building a portfolio for a client is you start with what’s the risk profile? And then from the risk profile you choose a strategic asset allocation. Now, that strategic asset allocation will be set based on the risk profile using maybe 20 years worth of historical data and I’m going to have, 20% Aussie equities, 30% international equities and I’ll go plus or minus 5% other way. So if you stop and think about that, how does that align with the client’s goal?

Fraser Jack: 04:04 It does not.

Jody Fitzgerald: 04:05 You spent all your time working out the client’s goal and then you’ve built this portfolio using old techniques basically. So realistically, if you’re investing with a strategic asset allocation as your main anchor point for your clients, the other thing that you’re doing is that you’re saying that it’s acceptable to actually have losses over time as well. Now, if you’ve got clients nearing retirement and if you remember the GFC and the sequencing risk issues that occurred there, again, it’s not aligning with the goals that you’re setting for your clients. So goals-based investing is something to become familiar with and understand.

Fraser Jack: 04:45 And where can people get informational or have this conversation a little bit more?

Jody Fitzgerald: 04:50 Well look, they can certainly reach out to us at Morningstar investment management and we’ve got people who can come out and and talk to you about goals-based investing. We can also teach you about goals-based advice and how to align that. We have a lot of educational pieces on behavioral finance and how people can actually be their own worst enemy when setting their goals and achieving those goals so they can reach out to your friendly local sales person at Morningstar. We’ll certainly help you with that journey.

  But maybe if I give you an overview now how goals-based investing actually works. So goals based investing, what you’re doing is realistically, rather than setting a strategic asset allocation and saying, “Okay, so let’s use Aussie equities as an example.” Going to have 20% Aussie equities and I’ve had plus or minus 5%. Now, if your goal is to achieve a certain return outcome over time. And let’s face it, most clients, if you say to them, “What’s risk?” If I asked my mum, “What’s risk?”, she’ll say, “Losing money.” It’s not volatility, it’s not track... It’s not any of those numbers or metrics that we think about it is don’t lose my money. So goals-based investing, what that does is that you invest in assets purely based on valuation driven asset allocation.

  So in other words, you only own an asset if the reward for the level of risk you’re taking is appropriate. If it’s not, don’t own it. What that means though is that if you think back to traditional strategic asset allocation, you hold all asset classes. And go plus or minus a little bit with goals-based investing, you have to have really wide ranges. You’ve got to have the ability to go full throttle in an asset class if there’s some fantastic opportunities. But you’ve also got to have the ability to not own an asset at all, which is not necessarily a comfortable spot for everybody. Because they they’ve quite anchored to and and understand the SAA approach. The other thing I would say with about goals-based investing is because it is driven by a valuation view of the markets and getting out of assets that are that are risky, it is very labor intensive.

  So it’s probably an area that you need to look to outsource. But I think that dovetails really well into the goals-based advice, because the whole premise of the goals-based advice is setting those goals and keeping your clients accountable, keeping them on track for the goals, making sure they’ve got all the right things in place to achieve those goals. Now that’s the real value out of that process.

Fraser Jack: 07:22 Yeah, the real job of the advisor is absolutely the accountability [inaudible 00:07:25] piece and the communication piece too is really huge. As markets change and as you said, if conditions change then you need to be on top of that and communicating to the client what’s going on.

Jody Fitzgerald: 07:38 Yeah. And I think the client conversations are easier under a goals-based investing because what you’re saying to you, let’s just say for example, is that your client wants to have a decent standard of living. So you want to big CPI. So most goals-based portfolios will be a CPI plus, whereas an SAA objective will be to meet the weighted average of the asset allocation benchmarks. So do I outperform the S&P 300? Do I out perform the [inaudible 00:08:08]? Et cetera. Again, doesn’t align to the client goals.

  But let’s just say that you set a goal for your client of I want CPR plus 3% because we know we’ve got a grow you off by 3% per annum on average to get you to the ultimate capital goal that you need. And we’ve got to keep pace with inflation. Sitting down, having conversation with the client of did we meet that goal this year? Or, are we on track to make that over the timeframe that we said we needed to do? So easy, it’s an easier conversation and it’s an easier way to keep them on track versus this year you got minus 10% but that’s okay because markets were down minus 15. That’s a much harder conversation and it’s not focused on the end outcome as well.

Fraser Jack: 08:48 Yeah. However your finance piece of... That losing money versus the wins get forgotten about and the losses get remembered.

Jody Fitzgerald: 08:56 Yeah, yeah, absolutely. So, but if you focus on the goal and this is the return we’ve got to meet overtime to achieve that goal, you’ll have more fruitful conversations with your clients.

Fraser Jack: 09:08 Yeah. Fantastic. Now tell me you’re presenting here at the conference as well?

Jody Fitzgerald: 09:12 I am. I am, yeah.

Fraser Jack: 09:14 What are you presenting on here?

Jody Fitzgerald: 09:15 Well, yesterday I did a panel session, an economic panel session. At the risk of boring everybody, but we tried to make sure we brought it back to what does it mean for portfolios? Because I think there’s a lot going on in the world at the moment, which does make managing a portfolio quite difficult there. The reality is everything is ridiculously expensive at the moment. There are no cheap assets.

Fraser Jack: 09:37 Yeah. What were the key takeouts from that session?

Jody Fitzgerald: 09:40 Well, the key takeouts was everything’s expensive. So therefore you’ve got to have a real focus on risk. You’ve got to make sure that you’ve got diversification there in the portfolios and to make sure within equity portfolios that you’re rotating out of cyclical equities and into more defensive to sort of protect the portfolios. For us as a real return, goals-based investing, we’re significantly in cash at the moment because we don’t think the reward for risk is there. So we have about 25% of the portfolio. What would be considered a typical balanced portfolio, [inaudible 00:10:15] cash.

Fraser Jack: 10:16 Yeah. And cash is hard at the moment, isn’t it?

Jody Fitzgerald: 10:18 Sorry?

Fraser Jack: 10:18 Cash is hard at the moment with the return that it’s not getting, I guess.

Jody Fitzgerald: 10:23 But the risk, right? So for us it’s all about downside risk. It’s that loss of permanent capital. That’s what [inaudible 00:10:30]. And as the market starts to sell off, we’ll go in with our, we call it keeping your powder dry, with our cash and scoop up assets at a cheaper valuation.

Fraser Jack: 10:42 Yep. Fantastic. And are you presenting tomorrow as well?

Jody Fitzgerald: 10:45 I am presenting tomorrow. So tomorrow I’m presenting on what not to own.

Fraser Jack: 10:45 Okay. Can you give us a sneak peak?

Jody Fitzgerald: 10:45 It’s a bit of clickbait, that title, isn’t it?

Fraser Jack: 10:47 Yeah. What not to own.

Jody Fitzgerald: 10:54 What not to own. So basically where are the most expensive elements of the market? So the U.S. Market is extraordinarily overvalued at the moment. Most equity markets have hit all time highs, but we find there are pockets of opportunities. But the U.S. we’re really cautious about. The only areas of the U.S. That we own a the more defensive areas.

  So consumer staples, because if we go into a recession, people still eat and healthcare because people still need health care. So they’re our favorite areas in the U.S. But outside of that we’re pretty much out of the U.S.

Fraser Jack: 11:28 Wow. Okay.

Jody Fitzgerald: 11:29 Which is big, right? Because it’s such a big part of the index and we’ve got hardly anything in there. Australia is another one that’s of concern with regards to where we’re at from a valuation perspective and also rates. So listed property, so the cap rates. So the interest rates and the discounts on it, they’re at all time lows. So the risks. So for us, the way we view risk is when we look at an asset, we think about what’s the probability of additional gains and what’s the probability of loss? So for U.S. Equities, Australian equities for for rates at this point in time, the probability of additional gains is low, but the probability of loss is very high, hence why we are pretty much will out of a lot of those assets.

  So within Australian equities we do own them within our portfolios, but very selective positions and filling modest weights. Bond markets are also over valued, though unfortunately because you’ve got all these central banks are manipulating the risk free rate and rates are going down, and down, down and the bond prices are being inflated as a result. So we’ve actually had a really perverse situation over the last sort of six months, although it’s starting to get a volatility creeping in at the moment, is that bond markets and equity markets have rallied together, which is weird, right? Because what that means is the bond market is telling you... If a bond market’s rallying, it’s telling you there’s a recession coming, but the equity markets are rallying coming into that. They both can’t be right.

Fraser Jack: 12:59 Yeah, it’s a strange time, isn’t it? Because normally they’re very much contradicting each other.

Jody Fitzgerald: 13:04 They really are. Yeah. So going back to that concept of, of goals-based investing, if you’re in the strategic asset allocation, right now, you are going to be heavily invested in the U.S. One of the most expensive markets. The other thing that’s extraordinary to understand about the U.S. equity market is that over the last sort of four years, the vast majority of the performance has been driven by stock buybacks. So when you actually look at the flow of money into that market, institutional investors, money managers have all gotten out. The flows have been basically the companies going into the bond market issuing really cheap debt and then using that debt to buy back their own stock.

Fraser Jack: 13:48 Wow.

Jody Fitzgerald: 13:49 Yeah. So that’s not going to end well. Right? So if you’ve got a strategic asset allocation approach, you’ve got a lot sitting in the U.S. You’ve also got a... And if you’re using a strategic asset allocation approach for an Australian client, you’ve got a fair chunk in Aussie equities, hence that whole, in a goals-based investment approach, the valuation of the risk will tell you to either be very underweight or not own it at all, and that will significantly help in terms of achieving the client’s goals.

Fraser Jack: 14:18 Thank you. Thank you so much for coming on the show today. I really appreciate it. That was a quick, short chat about markets and those sorts of things. As you mentioned, if somebody wants to continue the conversation, they can find you.

Jody Fitzgerald: 14:28 Yep. So Morningstar Investment Management. So you can reach out to me on LinkedIn. So Jody Fitzgerald and I can either help you or put you in touch with somebody in your state who can touch base with you.

Fraser Jack: 14:42 Fantastic. Thank you for coming on the show, sharing your insights, and good luck with your presentation tomorrow.

Jody Fitzgerald: 14:46 Brilliant. Thank you.

Fraser Jack: 14:49 Thank you. If you haven’t already, I’d love you to subscribe to the podcast on your podcast platform of choice. And to continue the conversation, head over to our social media channels. We’ll catch you next time.




Disclaimer: This document is a transcription obtained through a third party. There is no claim to accuracy on the content provided in this document, and divergence from the audio file are to be expected. As a transcription, this is not a legal document in itself, and should not be considered binding to advice intelligence, but merely a convenience for reference.