Ethical Investing

For InvestSMART's capped-fee diversified portfolios, we endeavour to create portfolios that accurately reflect the risk profiles that investors seek by diversifying across various asset classes. These portfolios range from Conservative, Balanced, Growth, Ethical Growth, to High Growth, with each portfolio designed to achieve the optimal balance between risk and return for its clients. It might seem counterintuitive for InvestSMART to allocate a significant portion of the portfolio to Australian equities; however, there are several justifications for this decision:

Home bias

Home bias is a tendency for investors to prefer investing in domestic assets, as they may have better familiarity and understanding of the local market. This home bias is not unique to Australian investors; it is a phenomenon observed across many countries. By having a significant allocation to Australian equities, InvestSMART caters to its client base's preferences.

Tax benefits

Australian investors may benefit from favourable tax treatments for investing in domestic equities. The dividend imputation system, for example, allows Australian shareholders to receive tax credits on dividends, effectively reducing the tax burden on these investments. These tax benefits can make Australian equities more attractive compared to international equities, leading to a more significant allocation in the portfolio.

Currency risk

By investing in domestic assets, investors can mitigate the currency risk associated with international investments. Fluctuations in exchange rates can impact the returns on international assets. By having a significant portion of the portfolio in Australian equities, InvestSMART helps its clients manage this risk.

Diversification within Australian equities

The Australian stock market encompasses many companies operating across diverse sectors, including finance, resources, and healthcare. Investing in a broad array of Australian equities, such as the entire ASX200 Index through an ETF like ASX: IOZ, InvestSMART can attain a considerable degree of diversification within this asset class. Consequently, this approach helps safeguard the portfolio against sector-specific risks.

A broad range of investment portfolios

InvestSMART acknowledges that clients have varying investment goals, timeframes, and risk profiles. To accommodate these diverse requirements, the firm provides an array of investment portfolios and strategies for clients to choose from based on their own understanding of their preferences and needs. InvestSMART does not offer personalised financial advice but empowers clients with a selection of investment options, allowing them to make informed decisions on which portfolio best aligns with their circumstances. This approach ensures that InvestSMART caters to a wide variety of client requirements without providing tailored financial advice.

In summary

While it might seem unusual for InvestSMART to have a significant allocation to Australian equities within their diversified investment portfolios, there are valid reasons for this decision. These include home bias, tax benefits, currency risk management, diversification within the asset class, and an extensive range of investment portfolios. However, it is essential for investors to understand their own risk tolerance and investment objectives and to carefully consider their options when selecting a portfolio to ensure appropriate diversification.

The InvestSMART Capped Fee Diversified Portfolio range invests in Exchange Traded Funds (ETFs) across a range of different asset classes including Australian shares, international shares, cash, fixed interest, property and infrastructure.

ETFs are great for managing risk, keeping costs low and providing a diversified portfolio.  

Our range of diversified portfolios focus on investing over several asset classes in different proportions to provide different risk vs. return profiles tailored to suit the requirements of all investors.

So, how do you know which portfolio to invest in?  

The core investment philosophy at InvestSMART focuses on the principles of diversification, low fees and investing for the long term. Exchange Traded Funds (ETFs), in comparison to unlisted managed funds, provide a cost-effective method to ascertain these goals. They also have liquidity benefits, being easier to buy and sell at short notice.

ETFs provide broad diversification by only needing to purchase a small number of securities. In contrast, when buying and holding hundreds of individual securities to achieve a similar level of diversification, greater costs are incurred in brokerage and fees – imagine the brokerage to buy 200 individual stocks!  

ETFs are also great for managing risk. When you invest in an ETF, you lessen individual company risk and sector risk. By holding a basket of individual stocks, you are not limiting your exposure to individual sectors of the market. 

In using ETFs, InvestSMART has the capacity to pass on these lower costs to the investor in the form of capped fees and low-cost investing. As fees compound over time, even a slight increase in fees can result in substantial differences to your return. 

You can read more on ETFs here.

We invest across a broad range of asset classes, as no one individual asset class is guaranteed to deliver substantial and consistent performance – once again it comes back to one of InvestSMART’s core principles of diversification.  

Full holdings for each portfolio can be found here, under Investment Preferences:

1. On the portfolio you are interested in, select 'learn more'
2. Scroll down to 'key facts'
3. Select the subheading called 'holdings'

From here, you will be able to see asset allocation by percentage, and also a comprehensive list of the holdings. 

How InvestSMART manages risk

Unfortunately, there is no way to completely avoid risk. As such, we opt to manage risk instead. The best way to mitigate risk and achieve better long-term risk-adjusted returns is through the process of diversification. 

We manage the portfolio's risk by maintaining and rebalancing the portfolios in line with the associated risk profile mandate. The risk profile mandate also corresponds with the recommended time frame.

Over time, with an adequately diversified portfolio, it is still possible to achieve an acceptable return. This is based on research by Nobel Prize-winning economist, Howard Markowitz, on the Modern Portfolio Theory. His theory demonstrates how you can combine numerous assets with different volatilities to minimise overall portfolio volatility.

When one portion of your portfolio is performing poorly, another is expected to be performing above average and balance out the negative effects of the asset lacking in performance.  

How investors can manage risk

Investors can manage risk by investing in a portfolio that is suitable to meet their goals and timeframe. Each of our portfolios has a mandate that explains the risk profile and suggested timeframe, which can be found here. 

Diversification in line with adhering to the investment timeframe significantly reduces the risk on your portfolio. 

InvestSMART offers a range of model portfolios that investors can choose from, which may fit their self-determined risk profile. There are a number of tools that can be used to get a better understanding of your risk profile.

Whilst we do not manage risk on a client-by-client basis, we do manage risk when selecting securities for these models.