Maximising passive low-cost investments into your portfolios by netwealth

Trend Hunter Series

Maximising passive low-cost investments into your portfolios Passive investing has become a global phenomenon allowing investors to track market performance (beta) at a low cost. Learn how you can build a passive portfolio, blend passive and active investments to get the best of both worlds, and explore the next evolution of passive investing of 'smart beta' with special guests Soteria Capital and Betashares.

26 August 2021 This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

Before we get started

Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No. 230975) is a provider of investment products and services and information contained in this presentation is of a general nature which does not take into account yours or your client’s individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth (or its related parties) should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision and before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth (including its related parties) product. This information has been prepared by Netwealth. Whilst reasonable care has been taken in the preparation of this presentation using sources believed to be reliable and accurate, to the maximum extent permitted by law, Netwealth and its related parties, employees and directors are not responsible for, and will not accept liability in connection with any loss or damage suffered by any person arising from reliance on this information. This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

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Housekeeping

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Enter your questions in the questions of webinar toolbar • We will get to them at the end of the webinar

Showcasing managed accounts

70 retail managed accounts

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300+ private label models

45 investment managers

Almost $10billion FUM

Why managed accounts? More than four in 10 (42.5%) advice firms use managed accounts today. Source: AdviceTech 2021

Professionally managed

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Investment customisation

Investment Transparency

Tax optimisation

Improved business efficiency

Meet today’s Trend Hunters

Vinnie Wadhera

Executive Director - Institutional and Adviser Business

Betashares

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Vincent O'Neill

CEO

Soteria Capital

Betashares Vinnie Wadhera

Executive Director - Institutional and Adviser Business

Betashares

This document is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

Netwealth Trend Hunters Vinnie Wadhera

Disclaimer BetaShares Capital Limited (ACN 139 566 868 / AFS Licence 341181) (“BetaShares”) is the issuer of this information. This is general information only and does not constitute personal financial advice. Investors should consider their circumstances, the offer document issued by the relevant SMA platform operator, the PDSs for underlying investments in the model portfolio, and obtain professional financial and tax advice before making any investment decision. PDSs for BetaShares Funds are available at www. betashares.com.au. This information is not a recommendation or offer to make any investment or to adopt any particular investment strategy. BetaShares Model Portfolios, including investments in underlying investment funds, are subject to investment risk, investment value may go down as well as up, and investors may not get back the full amount originally invested. To the extent permitted by law BetaShares accepts no liability for any errors or omissions in, or loss from reliance on, this information.

Confidential – may not be distributed without the consent of BetaShares Capital

How can passive strategies benefit your portfolio? Strategy 1: Low cost broad market exposures for core asset classes

Strategy 2: Smart Beta and Factor exposures for core asset classes

Strategy 3: Thematic exposures for satellite allocations

Strategy 4: Model Portfolio Solutions

Confidential – may not be distributed without the consent of BetaShares Capital

Portfolio Construction

c Sectors

Regions or c Countries

Confidential – may not be distributed without the consent of BetaShares Capital

CORE Global Equities Emerging Markets Fixed Income Australian Equities Listed Property Listed Infrastructure

Hedge Funds

c Alternatives

What is key for core allocation? Provide asset class exposure (Strategic Asset Allocation process)

The core of a portfolio is, by definition, the anchor of any investor’s portfolio and we believe should encompass the following characteristics:

Held for the long run Robust through all market cycles Compelling “value” strong, long-run, net-of-fee performance Contribute to the overall stability of the portfolio

Confidential – may not be distributed without the consent of BetaShares Capital

Over the long term, it’s about the fees Statistically significant relationship

Australian Large Cap Unlisted Funds: 5 Yr Annualised Return vs ICR Annualised Return (%) 14.00

Choosing a lower cost fund has historically resulted in higher after-fee long term performance.

12.00 10.00 8.00 6.00 4.00 2.00 0.00 0.00 -2.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Indirect Cost Ratio 4.00

-4.00 -6.00

Source: Morningstar, based on 5-year annualized returns as at 31 July 2020 and ICR of all funds classified as defined as “Australia Fund Equity Australia Large Blend“ and “Australia Fund Equity Australia Large Growth“ and “Australia Fund Equity Australia Large Value“ Morningstar Categories. Statistical significance of relationship described existed at a 95% Confidence Internal. Past performance is not indicative of future performance. Confidential – may not be distributed without the consent of BetaShares Capital

Active Managers Scorecard SPIVA (S&P Index vs. Active) findings on active manager performance v benchmark – % of funds that failed to beat the benchmark index

Sources: S&P Dow Jones Indices LLC, Morningstar. Data as at 31 December 2020. Past performance, whether actual or back-tested, is not indicative of future performance. Table is provided for illustrative purposes and reflects hypothetical historical performance. The S&P/ASX Australian Fixed Interest 0+ Index was launched 5 September 2014. The S&P/ASX Mid-Small was launched 15 August 2011. All information prior to an index’s launch date is back-tested (not actual), using the methodology in effect on the index launch date. Please note there are inherent limitations with backtested performance. Confidential – may not be distributed without the consent of BetaShares Capital

Balanced Profile Portfolio Asset allocation

Underlying holdings MER : 0.18% p.a.

Illustration only. Not a recommendation to adopt any particular investment strategy.

Confidential – may not be distributed without the consent of BetaShares Capital

How can passive strategies benefit your portfolio? Strategy 1: Low cost broad market exposures for core asset classes

Strategy 2: Smart Beta and Factor exposures for core asset classes

Strategy 3: Thematic exposures for satellite allocations

Strategy 4: Model Portfolio Solutions

Confidential – may not be distributed without the consent of BetaShares Capital

Evolution in Indexing : Smart Beta FTSE RAFI Australia 200 Index v S&P/ASX 200 Index Total Returns by Calendar Year (to June 2021)

FTSE RAFI Australia 200 Index uses four fundamental factors to select and weight index

FTSE RAFI 200 S&P/ASX 200 2021 YTD

FTSE Rafi Australia 200 Index v S&P ASX/200 Index: May 1992 – July 2021 2,450 2,250 2,050

FTSE RAFI Australia 200 TR Index (index BetaShares FTSE RAFI Australia 200 ETF seeks to track)

1,850

S&P/ ASX 200 TR Index

1,650 1,450 1,250 1,050 850 650 450 250 50 May 92May 94May 96May 98May 00May 02May 04May 06May 08May 10May 12May 14May 16May 18May 20

Confidential – may not be distributed without the consent of BetaShares Capital

TOTAL RETURN

FTSE RAFI AUSTRALIA 200

S&P/ASX 200

13.53%

Difference

10.40%

3.13%

2020

-0.01%

1.40%

-1.41%

2019

20.09%

23.40%

-3.30%

2018

-4.43%

-2.84%

-1.59%

2017

11.81%

11.80%

0.01%

2016

18.96%

11.80%

7.17%

2015

0.43%

2.56%

-2.13%

2014

5.60%

5.61%

-0.01%

2013

25.49%

20.20%

5.29%

2012

21.95%

20.26%

1.69%

2011

-9.42%

-10.54%

1.12%

2010

0.60%

1.57%

-0.97%

2009

48.58%

37.03%

11.55%

5.0%

5.8%

2008

-36.90%

-38.44%

1.55%

14.1%

13.8% 28.6%

20.07%

16.07%

4.00%

1 YR

33.6%

2007

8.3%

9.5%

2006

21.78%

24.22%

-2.44%

3 YR (p.a) 5 YR (p.a)

10.4%

10.0%

2005

23.10%

22.83%

0.27%

10 YR (p.a)

10.6%

9.8%

2004

26.52%

27.99%

-1.47%

20 YR (p.a)

10.0%

8.6%

2003

14.43%

14.61%

-0.18%

Inception (p.a)

11.3%

9.5%

2002

-2.96%

-8.77%

5.82%

Volatility (p.a)

13.3%

2001

17.40%

10.36%

7.05%

Risk-adjusted return

0.85

0.71

Ending value of $100

2,250

Value added since inception: 1.7% p.a

1,416

2000

7.81%

6.36%

1.45%

1999

19.13%

18.74%

0.39%

1998

19.97%

9.80%

10.17%

1997

13.22%

12.67%

0.55%

1996

16.39%

14.35%

2.04%

1995

20.41%

21.10%

-0.70%

Source: Bloomberg, FTSE. Table shows performance of underlying index relative to S&P/ASX 200 index, not ETF performance and does not take into account ETF management costs. You cannot invest directly in an index. Past performance is not an indicator of future performance of index or ETF. The FTSE RAFI Australia 200 Index was launched on 10/8/2009. Index returns prior to launch are simulated based on Research Affiliates' patented non-capitalisation weighted indexing system, method and computer program product. Actual investment results may differ from simulated results.

Index Characteristics 2: Focus on the sustainability of ROE

Factor Investing : ‘Quality”

3 factors to sustain high ROE

Financial Health Financial strength unlikely to be affected by economic fluctuations

Profitability Ability to generate cash-flow efficiently with high profitability

Business Stability Stable business model

Confidential – may not be distributed without the consent of BetaShares Capital

Low total debt to total capital ratio

Cash-Flow generation ability

High ROE into the future

Low earnings variability

Quality factor index performance vs market cap & active managers QLTY’s Index v MSCI World (AUD): January 2003 - 30 June 2021

800

700

600

500

400

300

iStoxx MUTB Global ExAustralia Quality Leaders Index (AUD) 1 Month (% ) 6.8% 3 Months (% ) 12.0% 6 Months (% ) 14.9% 1 Year (% ) 24.0% 3 Years (% , p.a.) 19.0% 5 Years (% , p.a.) 19.0% Inception (% , p.a.) 10.9%

MSCI World ExAus Index (AUD) 4.7% 9.3% 16.3% 27.5% 14.5% 14.7% 7.9%

iStoxx MUTB Global Ex-Australia Quality Leaders Index (AUD) MSCI World Ex-Aus Index (AUD)

200

100

0 Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

Dec-14

Dec-16

Dec-18

Dec-20

Source: Bloomberg, Morningstar Direct. Data as at 30th June 2021. Performance shown of the iSTOXX MUTB Global Ex-Australia Quality Leaders Index which QLTY aims to track and does not take into account QLTY’s 0.35% fees and costs. You cannot invest directly in an index. Past performance is not an indicator of future performance of the index or the ETF. Source: Bloomberg Graphs show performance of iStoxx Global Ex-Australia Quality Leaders Index v MSCI World Index, not ETF performance and do not take into account ETF management costs. You cannot invest directly in an index. Past performance is not an indicator of future performance of Index or ETF.

“Strengthen Your Core”

Problems with traditional fixed income benchmarks

Liability weighting 



Issuers can set their own weight in the index Issuer preferences determine risk profile of the index

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Inefficient

Unstable risk profiles 

Duration creep



Segment creep



Current monetary policy has impacted potential returns and capacity to provide meaningful diversification benefits

Segment creep of benchmarks Composition of Bloomberg AusBond Composite by class

Sources: Bloomberg, Betashares , Data to February 2020 Confidential – may not be distributed without the consent of BetaShares Capital

Innovations in Fixed Income Indexing

Provided for illustrative purposes only. Not a recommendation to make any investment decision or adopt any investment strategy.

Confidential – may not be distributed without the consent of BetaShares Capital

Example: Better building blocks Mod. Duration yrs

Yield to Maturity %

Cumulative Growth: Common inception (03/03/2008) – 30 June 2020

Yield to Maturity

Weight

+ Roll %

AGVT

7.89

1.00

1.63

55%

CRED

6.54

2.59

3.74

22%

QPON

0.10

0.74

0.99

23%

5.80

1.29

1.95

5.80

0.81

1.36

55:23:22 Portfolio Bloomberg AusBond Composite

Difference

0.00

0.59

Historical growth

Source: Morningstar Direct, as at 30 June 2020. Past performance is not an indication of future performance. Confidential – may not be distributed without the consent of BetaShares Capital

The key questions to ask your fixed income manager

How can passive strategies benefit your portfolio ? Strategy 1: Low cost broad market exposures for core asset classes

Strategy 2: Smart Beta and Factor exposures for core asset classes

Strategy 3: Thematic exposures for satellite allocations

Strategy 4: Model Portfolio Solutions

Confidential – may not be distributed without the consent of BetaShares Capital

Cyclical vs. Secular growth thematics Cyclical vs. Secular Growth Themes Secular Growth

Cyclical Themes (Dark Blue Waves) •

Occur at somewhat regular short - or medium-term intervals, typically based on changes in the business cycle

•

Can be mean-reverting, so that over a long period of time they tend to converge with some average level

•

Examples include asset valuations, volatility, interest rates, and currency values

Confidential – may not be distributed without the consent of BetaShares Capital

For illustrative purposes only

Cyclical Growth

Secular Growth Themes (Orange S-Shape) •

Occur as one-off shifts that change an existing paradigm

•

Tend to be longer-term in nature, “mega-trends”

•

Typically driven by powerful forces such as disruptive technologies, changing demographics and consumer behavior, or evolving physical environments

Passive exposures for “Secular Growth” (innovation) ASX: HACK

ASX: RBTZ

ASX: CLDD

ASX: ERTH

Global Cybersecurity

Global Robotics & A.I.

Cloud Computing

Climate Change Innovation

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Dynamic Asset Allocation Framework Growth expectations rising 19971999; 2011-2015; 2000

Inflation expectations falling

2000-2002 2008-2009; 2015-2016; 2018-2019

Credit Industrial US Small Caps commodities Value Financials Exporters Emerging Vanilla Market Energy Markets Capitalisation

US Large Caps Technology

Growth Quality Healthcare

Weighted Index Approach

USD, JPY Long-term government bonds

Gold

REITs Inflation-linked government bonds

Growth expectations falling Confidential – may not be distributed without the consent of BetaShares Capital

Soft commodities Utilities

2004-2006; 2016-2017

Inflation expectations rising

2007-2008; 2010-2011

*Modelled on Bridgewater’s approach to asset allocation

Passive exposures for “Cyclical” developed markets ASX: F100

ASX: HJPN

Asia Technology Japanese UK Equities Tigers exporters Confidential – may not be distributed without the consent of BetaShares Capital

ASX: HEUR

ASX: QUS

S&P500 EU Exporters Equal Weight Computing Banks,Cloud Resources & Energy

Passive exposures for “Inflation” exposures ASX:QAU/MNRS

ASX: FUEL

ASX: FOOD

ASX: QRE

ASX: BNKS/HBRD

Gold

Energy

Agriculture

Resources

Banks/Hybrids

Confidential – may not be distributed without the consent of BetaShares Capital

How can passive strategies benefit your portfolio ? Strategy 1: Low cost broad market exposures for core asset classes

Strategy 2: Smart Beta and Factor exposures for core asset classes

Strategy 3: Thematic exposures for satellite allocations

Strategy 4: Model Portfolio Solutions

Confidential – may not be distributed without the consent of BetaShares Capital

What are Advisers looking for in a model solution? Top 10 key attributes advisers will consider when evaluating a model Exhibit 1 Survey Results Avg Rank Fees Open Architecture Active/Passive Blend Tax-Aware Income-Oriented Seeded Track Record ESG Single Asset Class Individual Securities Active ETFs

Source – Morningstar As of 28 Feb 2021.

Confidential – may not be distributed without the consent of BetaShares Capital.

2.5

7.5

Low cost Model Portfolio Solutions $800,000 Underlying Fund Fees Portfolio Management Fee Netwealth Core Admin fee All in Fees

netwealth GSS Enhanced Strategic Balanced 0.21% 0.19%

Confidential – may not be distributed without the consent of BetaShares Capital

0.19% 0.19%

0.27%

Netwealth Plus Fixed fee 0-250k 250-500k 500k-1M All in Fees

BetaShares DAA Balanced SMA

$240 0.37% 0.27% 0.17% 0.67%

0.68%

BetaShares ETF Model Portfolios investment process

1. 2. 3. 4.

Asset class forecasts Risk assessments Portfolio optimisation DAA asset class tilts are determined

5. BetaShares Investment Committee reviews DAA tilts 6. ETP selection 7. Ongoing review and monitoring

*This is not a complete assessment of all applicable forms of investment risk. Investors should still ensure they are comfortable with risks and potential losses associated with their chosen investment option

Confidential – may not be distributed without the consent of BetaShares Capital

Value 1 : Dynamic Asset Allocation Dynamic positioning over a normal investment cycle

 Flexibility to seek to both: 1) Capture alpha from asset-class mispricing 2) Manage downside risk through the investment cycle by tilting from the strategic allocations

 A combination of a range of: 1) Quantitative models 2) Qualitative assessments by the BetaShares Investment Committee are used to position the DAA strategy in the context of the broader investment cycle

Confidential – may not be distributed without the consent of BetaShares Capital

Value 2 : Best-of-breed ETF selection Value 3 : Mix of Smart Beta & Market Capitalisation The underlying ETF product selection is based on investment merit, with both BetaShares funds as well as those from other managers used

Source: BetaShares, Positioning at 30 June 2021. Confidential – may not be distributed without the consent of BetaShares Capital

Value 4 : Model Portfolio Adviser Support As an Australian founded and managed firm, all decisions relating to the model portfolio service reside with the local business, and BetaShares is able to leverage the full resources of its local team to provide support to Advisers.

Confidential – may not be distributed without the consent of BetaShares Capital

BetaShares DAA Portfolios

Netwealth Platform Codes & Research Rating

Confidential – may not be distributed without the consent of BetaShares Capital

Soteria Capital Vincent O'Neill CEO

Soteria Capital

Vincent O’Neill CEO

Who Are We? Soteria Capital is the Investment Arm of Stanford Brown. Founded in 1987, we have been providing Australian families with the futures they want for over 30 years. Stanford Brown employs 45 staff across two locations and provides a complete range of Private Wealth and Benefits Advisory Services. Stanford Brown is self-licenced and privately owned by shareholders who all still work in the business.

Our investment philosophy Fewer.

Key characteristics of our portfolios: -

Dynamic portfolio adjustments based on market conditions

Shorter.

Shallower.

Focus on down-side protection over the long term, rather than chasing high returns

Rigorous fact-based analysis to support each decision

Low cost – only use active management and asset allocation where it adds value

Quarterly re-balancing, and quarterly asset allocation (or more frequently if required)

Why Fewer Shorter Shallower? An underappreciated law of investing is that losses do more harm to portfolios than gains of an equivalent percentage. If Investor A loses 20% and Investor B loses 30%, Investor B would require an additional 18% of returns to breakeven. Our investment philosophy is focused on downside protection, as outperformance during downturns is significantly more valuable than outperformance during booms.

Balance

% Loss

Balance after loss

Gain required to break even

$1,000,000

-5%

$950,000

$1,000,000

-10%

$900,000

11%

$1,000,000

-20%

$800,000

25%

$1,000,000

-30%

$700,000

43%

$1,000,000

-40%

$600,000

67%

$1,000,000

-50%

$500,000

100%

$1,000,000

-60%

$400,000

150%

$1,000,000

-70%

$300,000

233%

$1,000,000

-80%

$200,000

400%

$1,000,000

-90%

$100,000

900%

The Soteria Model Menu Active ETF Model

Original Active Model - Active and Passive Managers - $50,000 minimum - Available on Netwealth and BT Panorama C Conservative

MC Moderately Conservative

B Balanced

G Growth

HG High Growth

- ETF Investments Only - $20,000 minimum - Available on Netwealth C Conservative

MC Moderately Conservative

B Balanced

G Growth

HG High Growth

The Profile of the Soteria Capital Model Portfolios Investment universe Each Soteria Capital Managed Model invests in: • •

unlisted managed investment schemes (managed funds); ASX listed exchange traded funds

The model will normally hold 15 to 25 assets.

Model Portfolios - Neutral Weights & Min/Max % Growth allocations 100%

Maximum Neutral Minimum

80%

Soteria Capital offer the following Soteria Managed Models within the Managed Account targeting Growth to Defensive asset allocation as follows:

60%

•

Soteria Conservative Portfolio (30/70)

20%

•

Soteria Moderately Portfolio (50/50)

•

Soteria Balanced Portfolio (65/35)

•

Soteria Growth Portfolio (80/20)

•

Soteria High Growth Portfolio (95/5)

90% 80% 65%

40%

Max Neutral Min

40% 30%

80%

65%

50%

98% 95%

60% 50%

35% 25%

10%

Conservative (30:70) Mod Conserv (50:50)

Balanced (65:35)

Growth (80:20)

High Growth (95:5)

4 ways to add value to investor portfolios

Our experience contrasting the blended and the index only models o Very important to look through at the investment style of an active manager o Active managers add most value in sell off o Some active managers struggle to keep up in strong rallies

The Soteria Capital Fund Selection Process Universe of Funds in the Market

100’s

Using built in-house quantitative models we narrow the universe from hundreds of funds down to a list of 20-30 which are on our radar for further research.

On the Radar

20+

At this stage our aim is to understand how the fund performs in different market conditions, and more importantly, why? This stage involves detailed quantitative analysis. Examples on following slides.

Long List

10+

Funds on the long list are subject to in-depth qualitative due diligence, focusing on the people, organisation, governance and investment process. This step involves meeting the managers and site visits.

Short List

Short-listed funds are modelled to determine when to use the funds and how they interact with the rest of the portfolio.

On APL

2-5

Starting with the universe of funds in the market, our mission is to find the best of breed managers and funds in each asset class and sector.

Soteria Quantitative Analysis Quantitative analysis of active managers shows why a fund performs the way it does. What is the dominant style/sector? How does it perform in different market conditions?

Selecting Passive Managers Selecting the right passive manager is about understanding the drivers and characteristics of the underlying index that the ETF tracks. Using the Australian Floating Rate Debt sector as an example, we consider: • • • • • • •

% of Investment Grade Debt Senior or Subordinated Domestic or Foreign issuers Credit rating Volatility Interest Rate Duration Yield to Maturity

Questions and answers

Thank you Trend Hunters Series – Coming up

• Thu 26th Aug at 1pm - Maximising passive lowcost investments into your portfolios • Fri 27th Aug at 1pm - Decreasing yields and looking beyond traditional income strategies • Mon 30th Aug at 1pm – Managing volatility in retirement – lessons learnt during the Covid crisis

Portfolio Construction Podcast

In this podcast series, our investment research team pick the brains of key wealth management professionals to uncover unique insights on the investment areas they are most passionate about.

Disclaimer

The views expressed in this presentation are those of the author and presenter and do not necessarily reflect those of Netwealth Investments Limited’s. It is a general summary only. It is not advice nor an endorsement of any product or service. Netwealth Investments Limited (Netwealth) (ABN 85 090 569 109, AFS Licence No. 230975) is a provider of superannuation and investment products and services, and information contained within this presentation about Netwealth’s services is of a general nature which does not take into account your individual objectives, financial situation or needs. Any person considering a financial product or service from Netwealth should obtain the relevant disclosure document at www.netwealth.com.au and consider consulting a financial adviser before making a decision before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. This presentation is for general use. Modification of content is prohibited unless you have Netwealth’s express prior written consent.

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