The Netwealth Investment Approach

Netwealth’s ambition is to deliver sustainable portfolio performance over the medium-to-long-term to give our clients the best chance of meeting their investment goals. Our investment philosophy is designed in sympathy with this ambition:

  • Providing high quality, globally diversified portfolios built to deliver favourable returns in the investor’s chosen currency.
  • Access to socially responsible investing strategies, focusing on dynamic social and environmental goals without compromising on investment quality.
  • Conviction in the significant compounding value over time by minimising unnecessary, attritional costs within client portfolios.
  • 100% daily liquidity portfolios, but resistant to the idea of excessive trading.

To deliver on these ambitions, Netwealth’s investment process has three distinct parts, with ongoing risk management an integral component of each one:

Investment Team #2

Simon McConnell - Portfolio Manager (L), Iain Barnes - Chief Investment Officer (M) and Gerard Lyons - Chief Economic Strategist (R)

Building Strategic Allocations

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Selecting Investments for the 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 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.

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


In order to deliver the intended diversification of portfolios, the Netwealth investment process aggregates these asset classes using a disciplined, analytical approach:

  • We establish Capital Market Expectations for forecasts of individual asset class return and risk characteristics over the next 7 to 10 years. Historical information is used as a guide for asset class volatility, but forward-looking return assessments are adapted for current economic and market conditions, with valuations playing a major role.
  • The allocations take incremental increases in equity market exposure in progression from lower risk to higher risk portfolios, and these have remained consistent through time. Other asset classes are included to contribute to returns in periods of uncertainty, and expected characteristics and correlations are stress-tested to reflect the innate uncertainty about any predictions.
  • Two key risks are always in focus to deliver on client expectations: the risk of not meeting long-term performance goals and understanding the shorter-term drawdown potential of each Risk Level. Constraints on asset class allocations ensure the required level of diversification.
  • Strategic allocations leave the majority of international equity exposure unhedged from a currency perspective, allowing the portfolios to benefit from the diversification that such positions often bring, not least when the base currency of a portfolio goes through a period of stress.

Selecting Investments for our Portfolios

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 ‘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 if it 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.

Adopting Cyclical Positions

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.

Cyclical Positions Diagram Cyclical Positions Diagram

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.

Managing Risks

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.

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.

When investing your capital is at risk.