On April 21, 2016, netwealth's Head of Investment Management and Research presented a webinar on the topic of diversification

1. netwealth
Investments Limited
Paul O’Connor | Head of Investment
Management & Research

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Disclaimer
The information in this presentation reflects netwealth Investments Limited’s (‘netwealth’ ABN
85 090 569 109) understanding of existing legislation, proposed legislation, and rulings as at
the date of publication. While it is believed the information is accurate and reliable, this is not
guaranteed in any way. The financial product advice or information contained in this document
is of a general nature only. It has been prepared without taking into account the particular
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3. • Why diversify a portfolio?
• Principals of diversification
• Australian portfolios
• Use of professional management
• Conclusion
Agenda

4. • No one can predict the best performing asset class next year
• Assets have different risk & return characteristics
 Risk is typically viewed as the volatility of returns
 Returns are both income & growth
 Volatile growth assets
 Stable income producing assets
• Assets behave differently pending the economic & market environment
• Portfolio with one asset = dependency on the risk & return
 Mining share should perform well when countries such as China developing
 Retail share struggle when economy slows
 Combining a mining and retail share will lower risk (volatility of earnings) and produce a more
consistent return
Why diversify a portfolio?

5. • Single asset portfolios can perform well but need a lot of luck
 Highest returning assets eventually revert to mean
 Mean is the long term average return from an asset
 Investing in the best performing asset from last year is dangerous given reversion to mean
• Aim is to produce a diversified portfolio with differing sources of risk & return
• Assets risk & return should act differently to the same event. E.g. economic slowdown
• Diversification is recognised as the only ‘free lunch’ when investing
DON’T PUT YOUR EGGS IN ONE BASKET!
Why diversify a portfolio?

6. Principals of diversification

7. • Diversified asset allocation
 Cash, Australian & international fixed interest, property, Australian & global shares
 Portfolio will provide a smoother risk & return profile versus a single asset portfolio
 Mix asset classes pending the risk appetite and the investors needs & objectives
o Cash & fixed interest should provide stability
o Shares & property should provide growth
 Diversify within each asset class. E.g. Aust shares typically require 20 shares/ global 50
shares
• Country/ region diversification
 US share market circa 50% of the world
 Asia region has growing middle class
Principals of diversification

8. • Investment style diversification
 Passive exposure to markets = cheap & efficient
 Active management = efficient & can generate ‘alpha’ (excess return)
 Prudent investors consider both pending the asset class
• Currency exposures
 A$ volatile and influenced by global demand for commodities
 US$ driven by different factors
 Hedged or unhedged international assets?
• Fixed interest
 Over weight Australian fixed interest
 Credit opportunities in Australia
 Offshore credit markets far larger opportunity set
Principals of diversification

9. • Large exposures to Australian shares & property
 Two of the best performing asset classes from early 1990s till 2012
 Australian shares dominated by resources and banks (financials)
o Low exposure to industries such as IT, healthcare compared to global
 Australian property stellar returns last 20 years
o Sydney & Melbourne are two of the most expensive property markets globally
o Last economic recession 1990s – property returns linked to the broader economy
• Australian banks
 Aust equities and Aust fixed interest over weights
 4 of the largest stocks on the ASX
 Large credit issuers in Australia
• Cash
 Large term deposit holding – Aust banks!
 Need risk assets for growth
Australian portfolios

10. Use of professional management
• Impossible to manage appropriately diversified portfolio buying assets
• Investment managers can provide efficient diversified solutions
• Options include:
 Diversified & asset class specific portfolios
 Active or passive management
 Unlisted managed funds, exchange traded funds & managed accounts
• Portfolio management
 Efficient portfolio management
 netwealth platforms provide all of the above to allow choice

11. Conclusion
• No definitive rules for a diversified portfolio
• Want to ensure the portfolio is exposed to multiple sources of risk & return
• Consider:
 Diversified asset allocation
 Diversified asset class exposure
 Global assets – equities & fixed interest
 Currency
 Professional management
• Patience and a portfolio linked to the appropriate timeframe and your needs & objectives