Netwealth’s ambition is to deliver attractive portfolio performance over the medium-to-long-term in order to give clients the best chance of meeting their investment goals. The investment philosophy is designed in sympathy with this objective:
To deliver on these ambitions, Netwealth’s investment process has three distinct parts, with ongoing risk management an integral component of each one:
Gerard Lyons - Chief Economic Strategist (L), Iain Barnes - Head of Portfolio Management (M) and Simon McConnell - Portfolio Manager (R)
The purpose of the Netwealth strategic allocations across different asset classes and regions is to establish a portfolio mix that offers the best chance of meeting client expectations through the investment cycle, for each of the seven Risk Levels in sterling, euros and US dollars.
The long-term strategic mix of asset class exposures will always be the main driver of our portfolios’ returns, designed to offer diversified exposure to international capital markets with the aim of maximising returns for each client’s preferred level of risk. Strategic allocations are periodically reviewed to ensure they reflect the investment team’s latest thinking.
A broad range of investible asset classes are considered for inclusion, to provide the diversification of exposure to assets that perform well in different economic and market environments. At the same time, the Netwealth portfolios will not invest in more esoteric areas unless there is a clear benefit in doing so, either due to lowering the expected levels of risk or from producing higher expected returns.
The table below explains which assets are included in strategic allocations, and why.
|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|
In order to deliver the intended diversification of portfolios, the Netwealth investment process aggregates these asset classes using an analytical framework based on Modern Portfolio Theory:
For each of the allocations to different asset classes and regions within Netwealth’s portfolios, we invest predominantly in passive funds and exchange traded funds (ETFs). These aim to deliver the market returns of their specific asset class by tracking benchmark indices (for example, the FTSE 100 in the case of UK equities or the S&P 500 in the case of US equities).
These funds provide a highly-diversified exposure to each specific asset class in an efficient and cost-effective way.
Historically they have often performed better after costs than the majority of actively managed funds in the same asset class over 5 and 10 year periods, with returns not being eroded by the higher fees and trading costs associated with active management. If, however, we believe that there is a good reason to invest in an actively-managed fund or, in the case of markets such as short-dated government bonds, to invest directly, we will do so
Several key criteria are considered when selecting the specific passive fund to invest in for each asset class, including:
The management of Netwealth’s portfolios is an ongoing process by our seasoned 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.
Investment risk is multi-faceted, but can be summarised as:
Responsibility for monitoring and managing these risks lies with the Investment Committee, which makes use of a combination of sophisticated proprietary and bought-in analytics in order to do so.