WealthSmart offers its clients a portfolio that will change over time depending on how it performs. The amount of risk taken will increase with good performance and decrease with negative movements so as to capitalise on returns while protecting the initial investment.
There isn’t a traditional risk rating for the portfolio as a whole as this will change over time but you will always be able to see the makeup of your portfolio in your client portal.
The chart below shows the long-term relationship between asset allocation and the growth of the portfolio. Please note we regularly review and update our strategic asset allocation based on market conditions and our market outlook.
Your portfolio will start mostly invested in government and corporate bonds. These are lower risk and are unlikely to see big price fluctuations in a short period of time. There is a small (10%) allocation to equity which is where we aim to drive your performance.
As your investment grows, we will slowly invest more into equity to balance between the protection of your initial investment and driving growth.
How we select investments.
We believe in open architecture investing, which means we have no in-house products or conflicts of interest when selecting investments.
Our investment universe is primarily made up of collective investment funds. For each asset class, we analyse relevant investment vehicles and create a short list of the investments that meet our criteria. We categorise collective investment funds into two groups: passive and active (which include smart beta and factor funds).
Passive investing refers to an investment strategy that tracks an index, typically a market index but sometimes also sector or region-specific indexes. In a passive strategy, the manager does not favour individual securities within the index.
By contrast, an active strategy is one where the manager may decide to overweight or underweight certain securities within the index against which the portfolio’s performance is assessed.
Based on our rigorous fund selection process we make a list of qualifying investment funds which are regularly monitored and reviewed by the investment committee.
We believe passive investing has many benefits including reducing the tracking error with underlying indices, low costs and broad diversification. However, passive investing has its limitations, particularly when the underlying index does not have an intuitive construction process or is difficult to replicate.
We are particularly cautious when the ETFs or index funds are more liquid than the underlying constituents. For these reasons and our belief that it is possible for an active manager to outperform on a risk-adjusted basis in specific markets, we look to invest in active funds when appropriate.
Both passive and active investing have pros and cons, therefore we believe it to be in the best interest of clients to give portfolio managers the discretion of selecting the investment strategy they deem most likely to achieve the clients’ investment objectives.
The three main asset classes are: cash (including cash equivalents), bonds (fixed income) and equities (stocks). These are further divided into six sub asset classes: cash, government bonds, corporate bonds, high yielding bonds, developed market equities and emerging market equities.
Keeping funds on deposit with another financial institution or lending to high quality corporate companies and governments for less than two years.
Pros: Very liquid and low risk.
Cons: Low yield and might not be able to keep up with inflation over the long term.
Government Bonds: Lending to governments with low default, inflation, legal, and political risk.
Pros: Low default and capital risk. Provides stability to the portfolio, has the potential to perform well when other investments are performing poorly.
Cons: Inflation and interest rate risk. Potentially Low returns.
Lending to large companies with strong credit ratings.
Pros: Regular income
Cons: Interest risk and default risk, less upside than equities.
High Yielding Bonds
Lending to companies and governments with a higher probability of default.
Pros: High yield, generally less interest risk versus corporate and government bonds.
Cons: Default risk, greater correlation to equities
Developed Market Equities: Investing in companies that are listed on exchanges based in developed countries.
Pros: Capital upside and some income in the form of dividends
Cons: Capital risk, volatility, currency risk
Emerging Market Equities
Investing in companies that are listed on exchanges based in emerging countries.
Pros: Capital upside, greater exposure to faster growing economies
Cons: Capital risk, volatility, currency risk, political risk, accounting risk, liquidity risk
Our approach to sustainability
Climate change, shifting demographics and the technology revolution are reshaping our planet. Companies able to adapt to this change will be more successful in attracting customers, grow their business and have a positive impact on our beloved planet.
Our approach aims to provide better returns over the long term by incorporating a climate ‘tilt’ to the the overall holdings of the products we invest in. This means having greater exposure to companies that are likely to benefit from the transition to a low-carbon economy.
Does sustainable means lower returns?
There remains some hesitation in finance regarding sustainable investing, often due to long held beliefs that sustainability requires sacrificing financial returns.
In a recent study by the Harvard Business School, the performance of 90 high-sustainability companies is compared to 90 low-sustainability companies.
The study considers high-sustainability as “having a substantial number of environmental and social policies adopted for a significant number of years” and Low-sustainability as “firms that adopted almost none of these policies”. It concludes that over an 18 year period, the former outperformed the latter by 4.8% per annum.
To understand what's at stake, a 2015 study by the Economist Intelligence Unit estimates that the loss that could result from climate change to all globally managed financial assets is between $4.2 trillion and $43 trillion, between 2015 and the end of the century.
The study finds that much of the impact on future assets will come through weaker growth and lower asset returns across the board. As more scholars cover this topic, the evidence is starting to stack up in favour of companies paying due regard to social and environmental concerns.
The financial sector is paying attention and starting to adapt. As this trend progresses, we will slowly ratchet up our exposure to high-sustainability companies.
Our present goal is to make ensure our portfolios have a substantially lower carbon footprint that the industry norm (more data on this to follow).
*Past performance is not an indication of future performance