Investment Team #2 Investment Team #2

Our Investment Approach

Delivering sustainable portfolio performance to help clients achieve their financial goals

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A proven process and strong track record

Since it was founded, Netwealth has helped thousands of clients achieve their financial goals – consistently building sustainable portfolio growth over the medium-to-long term. Our investment philosophy is driven by a deep understanding of the market, cutting edge technology and competitive pricing. This comprises:

  • High quality, globally diversified portfolios built to deliver favourable returns in your chosen currency
  • Access to socially responsible investing that doesn't compromise investment quality
  • Conviction in compounding wealth over time by keeping unnecessary costs out of your portfolio
  • 100% daily liquidity, but we avoid excessive trading to protect your long-term growth

Our investment process has three distinct parts

Ongoing risk management is integral to each

Building strategic allocations

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Selecting investments for your portfolios

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Adopting cyclical positions

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Building strategic allocations

The purpose of the Netwealth strategic allocations across different asset classes and regions is to establish a portfolio mix that gives clients the best chance of meeting their goals throughout the investment cycle. We offer this approach across seven Risk Levels, available in sterling, euros, and US dollars.

The long-term mix of asset classes is the primary driver of your portfolio’s returns. We aim to give you diversified access to global markets while maximising returns based on your chosen risk level. Our team regularly reviews these allocations to ensure they reflect our latest thinking.

We include a broad range of asset classes to ensure your portfolio is diversified across different market conditions. However, we avoid more complex investments unless they clearly reduce risk or offer higher potential returns.

The table below shows which assets are part of our strategic allocations and why we’ve chosen them.

Asset class Characteristics
Cash and money market Capital preservation, liquidity
Domestic government bonds Capital stability, provision of income
International government bonds Capital stability, provision of income
Inflation linked government bonds Capital stability and inflation-protected income
Corporate bonds (investment grade and high yield) Higher income but historically riskier than government bonds
Emerging market sovereign and corporate bonds Higher income but historically riskier than domestic government bonds
Domestic equities Growth via domestic companies
International developed market equities International growth, with currency exposure unhedged or hedged
Emerging market equities Higher prospective growth and risk premia
Alternatives Diversification through alternative sources of risk premia

 

Achieving portfolio diversification through a disciplined investment process

Our data-driven approach combines different asset classes, using a rigorous, analytical process

  • We establish Capital Market Expectations to forecast asset class returns and risks over the next 7 to 10 years. While we consider historical data for asset class volatility, our return forecasts are adjusted for current market conditions, with valuations playing a key role.
  • Our portfolios increase equity market exposure progressively from lower to higher risk levels, with consistent allocations over time. Other asset classes are included to provide returns during uncertain periods, and we stress-test expectations to account for unpredictability.
  • We focus on two key risks: the risk of not meeting long-term performance goals and understanding the short-term drawdown potential at each Risk Level. Constraints on asset class allocations ensure sufficient diversification.
  • For international equities, we leave most currency exposure unhedged, allowing portfolios to benefit from diversification (especially during times when the base currency is under stress).

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Selecting investments for your portfolios

For each asset class and region in Netwealth’s portfolios, we mainly invest in passive funds and ETFs. These funds aim to match the returns of their specific market by tracking benchmark indices, such as the FTSE 100 for UK equities or the S&P 500 for US equities.

 

This approach provides broad diversification in a cost-effective and efficient way. Historically, passive funds have often outperformed most actively managed funds after costs over 5- and 10-year periods, as they avoid the higher fees and trading expenses of active management.

 

However, when we see a strong case for using an actively managed fund or, in some cases, investing directly (like with short-dated government bonds), we will do so.

Our criteria for selecting passive funds

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  • The ‘fit’ of the fund’s underlying investments and benchmark index with the desired exposure within the specific asset class.
  • How well the fund tracks its underlying benchmark index.
  • The methodology being used to replicate the benchmark index. For example, whether it physically holds the underlying securities referenced by the index or uses a synthetic replication strategy.
  • The total expense ratio of the fund, which represents the total cost of investing in the fund.
  • The size and liquidity of the fund.

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Adopting cyclical positions

The management of Netwealth’s portfolios is an ongoing process by our experienced investment team, with regular formal Investment Committee meetings. One of the responsibilities of the Committee is to consider any potential changes to portfolio positions to address specific economic or market risks that may knock their performance off-track. However, such “cyclical” adjustments will never be of the magnitude whereby they distract from the value proposition of our diversified strategic allocations.

Honed within an institutional environment, the process is intended to be thoughtful, transparent and repeatable, and to fit within a monthly cycle. The process of adopting cyclical positions is always risk-conscious and cost-aware, being evaluated after all trading costs have been taken into account.

When assessing potential cyclical positions, the investment team looks at the macro-economic environment, inferred policy response, asset fundamentals and valuation levels, as well as market positioning. The impact of cyclical positions is considered primarily at the portfolio level, but also monitored and measured on a standalone basis to retain investment discipline.

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Cyclical Positions Diagram

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Understanding and managing risk

Investment risk is multi-faceted, but can be summarised as:

  • Market risk – understanding the inherent volatility of investing in different assets.
  • Portfolio risk – monitoring the interaction of asset classes to maintain diversification.
  • Event risk – undertaking scenario analyses of historic events.
  • Instrument risk – undertaking initial and ongoing due diligence.
  • Liquidity risk – ensuring all portfolios have 100% daily liquidity, at an estimable market price.

Our investment committee carefully monitors these risks on an ongoing basis, using in-house and external tools.

Our risk-conscious approach ensures a transparent process resulting in diversified and liquid portfolios. Any potential market shifts or specific economic conditions are addressed promptly without compromising long-term strategic goals.

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