Building a successful investment portfolio requires not only selecting the right mix of growth and defensive assets, but also incorporating investment preferences such as sustainability and deciding on an investment style (e.g., passive vs. active investing).
In this post, we explore how investors can align their portfolios with Environmental, Social, and Governance (ESG) principles, choose between active and passive investment strategies, and select the best fund structures to meet their financial goals.
Incorporating Investment Preferences (ESG Investing)
Many investors want their portfolios to reflect personal values related to sustainability, ethics, and corporate governance. However, ESG investing requires making key decisions about which factors to prioritize and how to apply them in an investment strategy.
ESG Considerations
- Environmental Factors: Climate change, pollution, waste management
- Social Factors: Labor standards, diversity, human rights
- Governance Factors: Executive pay, corporate ethics, board composition
With a growing number of ESG investment options available, investors must navigate different approaches and potential pitfalls such as greenwashing, where funds claim to be sustainable but do not follow rigorous ESG standards.
Three Common ESG Approaches
- Unscreened Portfolio (Traditional Investing)
- No ESG-specific filtering
- Broadest exposure to sectors and regions
- Relies on market pricing and external regulations to shape corporate behavior
- May still involve shareholder engagement on governance issues
- Light Green Approach (ESG Screening)
- Uses negative screening to remove companies with revenue from controversial sectors (e.g., fossil fuels, tobacco)
- Uses positive screening to invest in companies with strong ESG practices
- Typically results in low deviation from standard market returns
- Many low-cost, well-diversified funds available
- Dark Green Approach (Impact & Thematic Investing)
- More restrictive selection of companies based on ESG performance
- Often focuses on sustainability-driven sectors
- Greater potential impact but may involve higher risk and lower diversification
- Requires more in-depth research or specialized fund managers
Choosing an Investment Style: Active vs. Passive
Investment strategy plays a critical role in portfolio performance. The two primary approaches are active investing and passive (index) investing.
Active Investing
- Fund managers actively buy and sell securities to outperform the market
- Based on research, forecasting, and economic trends
- Typically involves higher fees and greater risk
- Success rate is low—SPIVA reports show that ~80% of active funds underperform their benchmarks over time
Passive Investing (Index Funds & ETFs)
- Aims to replicate market performance by tracking broad indices
- Lower fees and consistent long-term returns
- Less reliance on market timing and manager skill
- Recommended for most investors due to cost efficiency and diversification
Smart Beta & Multifactor Investing
- A middle-ground approach between active and passive investing
- Tilts toward factors such as value stocks, small-cap companies, and profitability
- Can enhance returns while keeping costs lower than traditional active funds
- More complex to implement—may require an adviser’s guidance
Selecting the Right Fund Structures
After determining asset allocation and investment style, investors need to choose the best fund structures for tax efficiency and diversification.
Key Factors When Selecting Funds
- Low Fees – Minimizing costs improves long-term returns.
- Tax Efficiency – Choosing the right structure for your tax jurisdiction.
- New Zealand investors may benefit from Portfolio Investment Entities (PIEs).
- U.S. citizens in New Zealand should avoid PIEs and instead use U.S.-listed ETFs to avoid Passive Foreign Investment Company (PFIC) tax issues.
- Wide Diversification – Holding thousands of securities reduces company-specific risks.
- Liquidity – Ensuring assets can be accessed when needed.
Recap: Key Steps to Implementing Your Investment Plan
Throughout this investment series, we have covered:
- Understanding Major Investment Markets – Identifying asset classes suitable for individual investors.
- Recognizing Risk Factors & Risk Premiums – Determining which risks are worth taking for better returns.
- Constructing a Balanced Portfolio – Allocating assets between growth and defensive categories.
- Selecting Investments & Preferences – Incorporating ESG values, choosing passive or active strategies, and optimizing fund structures.
A structured, evidence-based approach ensures that investment decisions align with personal values, risk tolerance, and financial goals.
Final Thoughts
By following this step-by-step investment framework, investors can build efficient, diversified, and cost-effective portfolios. Whether your priority is maximizing returns, managing risk, or incorporating ESG preferences, having a clear investment philosophy helps you stay on track.
If you need guidance on financial and retirement planning, particularly as an international migrant in New Zealand, check out our YouTube channel Pacific Wealth (NZ) or explore other articles on our website.
