Strategic Allocation Review – Summer 2017

At Netwealth, our ambition is to deliver attractive portfolio performance over the medium-to-long-term in order to give our clients the best chance of meeting their investment goals. The investment philosophy is designed in sympathy with this objective:

• High quality, diversified investment portfolios are built to deliver long term, sustainable performance in the investor’s chosen currency.
• Views are based on long term strategic thinking, so we can be more patient for the investment team’s views to be rewarded.
• Conviction in the significant compounding value over time by minimising unnecessary, attritional costs within client portfolios.
• Portfolios with 100% daily liquidity, but resistant to the idea of excessive trading.

Investment Process

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

• Building Strategic Allocations: the construction of high quality portfolios offering diversified exposure to international capital markets, with the aim of maximising returns for each client’s preferred level of risk over the longer-term horizon. These will also be the key driver of returns.
• Instrument selection: ensuring the instruments we choose to implement our investment views are the most appropriate to meet our goals.
• Adopting cyclical positions: at certain times, we consider departing from the strategic allocations to address specific economic or market risks that may threaten performance.

Strategic Allocation Review

We review the strategic allocations periodically, and have recently adjusted the composition of the sterling-denominated portfolio range to ensure they reflect the investment team’s latest thinking.

Our 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.

Consequently, since the Netwealth sterling portfolios were launched in May 2016, portfolio performance has benefited from the weakening of the domestic currency throughout the period. However, as part of our strategic review in August, we recognised that the valuation argument in favour of holding more exposure to the pound on a strategic basis has become more compelling, and as such we have raised the allocations accordingly, at the expense of US dollar exposure.

Note that this does not preclude us from making cyclical adjustments to portfolios if macro and market conditions necessitate such action. It seems likely that sterling will continue to be buffeted by political and economic events. However, on a strategic basis, the balance of risks have changed, given how much cheaper sterling has become. We understand that a sustained strengthening of the pound would hinder overall portfolio returns, due to the translation of unhedged international asset prices. While this is not our base case expectation, we have taken action to dampen exposure to this risk factor in future.