When Stars Collapse, Investors Need a Reliable Source of Gravity

19 June 2019 by

As the star fund manager culture implodes, we look at how a challenger wealth manager like Netwealth’s investment approach offers a more sensible and consistent trajectory to help investors achieve their goals.

The importance of low fees

Fees for managing your money are unavoidable, but importantly, they are controllable. Keeping fees as low as possible can have a big impact – and allows us to focus on helping clients compound their returns at a higher rate.

For example, if we assume an annual portfolio return of 5% and compare all-in annual fees of 1.86% (of a traditional wealth manager) vs. 0.85% (Netwealth), you would be nearly £100,000 better off if £250,000 is invested over a period of 20 years.

Source: Netwealth, Assumes an annual gross return of 5%. The traditional wealth manager fee of 1.86% is calculated as the average total expense ratio (TER) of the wealth managers listed in research by Numis and Citywire published by Citywire Wealth Manager in February 2015. The TER for Netwealth is calculated as 0.85% based on the 0.50% all-in fee, 0.30% estimated all-in underlying fund costs and 0.05% estimated annual costs of trading.

An actively passive approach

We actively manage low cost passive investments – mainly through passive funds and ETFs – which has led to all our portfolios outperforming our peer groups since our launch three years ago.

In contrast, in each of the major equity regions, the average active manager has underperformed the passive option over the last three years – with the popular “Equity Income” style of management, embraced by star managers like Woodford, faring even worse.

Three-year annualised returns of investment association sectors

Source: Morningstar, Bloomberg, Netwealth calculations. All annualised returns shown net of fees in GBP terms, as of 31st May 2019.

This demonstrates the risk of ‘crowding’ into popular themes in markets – relentless marketing meant that the weight of money searching for income strategies doomed investors to mediocre future returns. This is why we focus on broad market exposure rather than a thematic approach. We also target total returns rather than income only.

Managing biases

We don’t follow a star manager approach – which is often conviction-led – and therefore believe our investors are protected from many of the behavioural pitfalls (including overconfidence) that can meaningfully impact long-term investment performance targets.

It also helps to avoid ‘style drift’, whereby a manager who has historically had a particular approach to investing shifts towards assets with altogether different characteristics over time.

Liquid and diversified investments

Because the lack of low-hanging fruit makes outperformance harder, even the most talented managers are tempted to stretch beyond their area of expertise. This can lead to fund managers investing in areas such as unlisted companies, which can be difficult to liquidate quickly if needed.

We stick to sensible, calculated combinations of diversified, liquid assets – to ensure the interests of our clients are better safeguarded.

The Netwealth difference

The above factors speak to our investment approach and how it challenges many of the traditional (and riskier) approaches in our industry. However, we also offer investors more in other ways – as this article shows – such as more control and better transparency.

We explain why our personal experiences and needs led us to set up Netwealth: to revitalise the outdated wealth management sector and to make the investment journey a lot smoother and more enjoyable.

Please remember that when investing your capital is at risk.

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