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Investment philosophy


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Established in 1992, privately owned and not associated with any bank, insurance company or investment fund manager.



Investment philosophy

PART 1 - The nature of investing
PART 2 - Setting an objective
PART 3 - Determining a strategy
PART 4 - Criteria for selecting investments

APT Strategy's approach to providing investment advice starts with the assumption that:

The investment objective is to:

  • avoid a financial disaster; and
  • obtain a reasonable return.

"Financial disaster" is intended to mean a major and permanent loss of purchasing power that will have serious impact on one's quality of life. Such loss could be sudden as in the case of financial product failure, market collapse, fraud, etc. or it could be a gradual erosion of purchasing power due to the combined effects of inflation, expenditure, and the return earned on the investment.

"Reasonable return" is intended to mean that a return is satisfactory considering the state of the relevant investment markets. This return is expected to rise and fall over time with the investments losing value during some periods and gaining value in other periods. There is no way to reliably predict the actual return over any period or the impact on purchasing power.

These two components of the investment objective may seem independent of one another, but they are linked in that it is generally necessary to achieve a reasonable return to avoid a financial disaster. If the return were too low one's purchasing power would be likely to be eroded by inflation and expenditure. Thus, good investment advice involves using judgment to balance the risks of financial disaster as a result of being too conservative and the risks of financial disaster as a result of being too aggressive.

Some people prefer to set objectives such as:

  • a specific rate of return,
  • a specific rate of return in excess of CPI, or
  • a specific dollar value by a certain date.

Such objectives provide a convenient benchmark against which performance can be measured and they may give a feeling of comfort, certainty and security. However, APT Strategy's view is that setting such objectives is much the same as a travel agent setting objectives in respect of the weather. Such objectives are really just wishful thinking.

This is not to say that quantifiable objectives have no value. On the contrary, they can be valuable, but such objectives should relate to things we can control (e.g. our expenditure, our savings, and our income). Similarly, projections can be useful, but one should be very careful in the way one use's projections as they can give a feeling of confidence that is unwarranted. Long term projections are particularly dangerous as small deviations from the assumptions can have a very large impact on the outcome.

Our strategy for achieving the objective is essentially one of being prepared for uncertainty. This is very different to trying to predict the future and it is based on the belief that the investment markets are sufficiently efficient that it is not possible for anyone to reliably out-guess the market.

This is a very contentious issue. Many people hold the contrary view that there is opportunity for those with the expertise, talent, resources, etc. to take advantage of these market mispricing.

It is impossible to prove who is right.

  • Some people do seem have an uncanny knack for being in the right place at the right time, but it is this the result of luck or skill?
  • Is it reasonable to extrapolate a person's past results when history shows that whizz-kid managers and entrepreneurs come and go?
  • In order to take advantage of any market mispricing one must reach a conclusion faster than the rest of the market because unless the rest of the market eventually reaches the same conclusion the price will not move the way one expects. Is it realistic to believe that anyone has such an advantage over the rest of the world?
  • Even if it were possible for some people to reach a conclusion faster than others their buying/selling would tend to drive the price towards what they believed was the correct price such that any mispricing would be very small and temporary. If it were possible to make good profits from such inefficiencies in the market surely the actively traded funds would perform better than they do?

Much as we would like to be able to claim that we have a crystal ball, or an economic model, or a forecasting methodology that would enable us to profit from inefficiencies in the market we recognise our limitations - and those of others.

Our strategy for achieving the objective of avoiding a financial disaster and obtaining a reasonable return involves:

  • determining an appropriate investment strategy;
  • managing risk by designing a portfolio that is appropriately diversified, and
  • selecting appropriate investments.

For example, in determining an appropriate investment strategy we would not only consider the client's objectives, their financial situation and their needs, but we would also consider issues such as:

  • the relative merit of investing internationally (e.g. globally, specific regions, developing countries, etc.)
  • the relative merit of different asset classes (e.g. shares, property, fixed interest, collectables, commodities, precious metals, etc.)
  • the relative merits of sector specific funds versus balanced funds;
  • the current tax advantages of superannuation versus the ongoing legislative risk associated with the superannuation environment;
  • the potential to earn more by borrowing money for investment versus the risk associated with borrowing money;
  • the merits of a "buy and hold" approach versus trading;
  • the advantages and disadvantages of owning an investment property;
  • whether it is better to own investments such as shares directly via managed funds;
  • whether index funds are better than managed funds; and
  • whether it is better to ride an investment through the ups and downs of the market or try to buy at the bottom of the market and sell at the top.

In managing risk we would consider the extent to which each of the following forms of diversification should be used:

  • asset class
  • manager
  • legislation
  • geographic region
  • time
(These forms of diversification were discussed in 1988 by Paul Gerrard, a founding and current director of APT Strategy, in an article titled "Diversification - a risk reduction strategy. Copy of article)

The significance of diversification may also be examined via statistical theory, past data, and random walk simulations. Such examination can help to address questions such as:

  • What is a reasonable exposure to a specific investment?
  • How many shares would one need in a portfolio in order to reduce the "unsystematic risk" to a reasonable level?
  • Is it better to try to pick the "best" investment or several "good" investments?

Continue to PART 3 - Determining a strategy