netwealth Investments LimitedPaul 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 objectives, financial situation or needs of your clients. Applications to invest in a financial product, or use any service provided by netwealth must be made by completing the applicable Disclosure Document which can be obtained from netwealth. Prospective clients should consider the applicable Disclosure Document before deciding to acquire or dispose of the product, or utilise any service offered by netwealth.

• Why diversify a portfolio?

• Principals of diversification

• Australian portfolios

• Use of professional management

• Conclusion

Agenda

• 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?

• 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?

Principals of diversification

• 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 stabilityo 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

• 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

• 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 globallyo 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

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

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