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2003 - an interesting year

18 January 2004 Angelo Coppola

SA asset classes in 2003 had an interesting range of returns, once again dominated by the Rand effect, reports Paul Stewart, head of retail asset management at m Cubed.

Even normally staid institutional and retail investors seem to be catching World Cup fever. So much so one major financial service business has begun explaining investment strategy in terms of soccer tactics.

In its latest report to investors, Absa Investments relies entirely on football terminology to present its market views

Craig Pheiffer: General Manager: Absa Asset Management Private Clients, notes: “There’s no getting away from the soccer mania as the World Cup approaches and it seems that positioning your investment portfolio is very much like playing a game of football.”

He says recent ‘pitches’ (market uncertainties in 2008 and 2009) have been uneven, but the half-time distribution of ‘oranges’ (fiscal and monetary stimulation packages) has re-energised many national teams.

Now it’s time for South Africans to get their selections right as investment is a team game and balance is vital.

Pheiffer adds: “Football teams comprise strikers that score goals, midfielders that do the hard work getting the ball to the attackers, defenders that prevent goals being scored by the opposition and, as a final line of defence, the goalkeeper. An investment portfolio’s make-up is the same.

“For long-term wealth creation it’s all about having equities up front earning returns above inflation.

“In the mid-field you need the sometimes attacking, sometimes defending qualities of fixed-interest securities such as government, parastatal and corporate bonds, plus listed property (giving modest capital appreciation over time with good interest income).

“In defence you need prime-linked perpetual preference shares that provide a solid dividend income although with some variability of capital. The last line of defence is cash. The goalkeeper is reliable, but will never score goals.”

Big-game pundits at Absa Investments currently incline toward a slightly defensive formation.

They are neutral on equities as “the market is above fair value on historical measures. Valuations based on future expected earnings need to be considered with regards to stock and sector selection”.

They are underweight on bonds as “an increase in the supply of bonds due to government financing needs is likely to impact negatively on yields”, though opportunities exist for selected corporate and longer-dated government bonds.

Solid defensive cash and preference share positions get the nod. Pheiffer observes: “Yields are expected to remain broadly flat at their multi-year lows, but cash offers safety in an uncertain environment and preference shares provide tax-efficient income.”

A winning result at the World Cup depends upon sound tactics and strategy engineered by an informed coach. Fans (or investors) may have a good knowledge of the game but they can’t expect to get their selections just right. Absa Investments has a solution – a quality asset allocation portfolio designed to deliver good performance under pressure.

Says Pheiffer: “Each client has unique investment requirements, constraints and risk tolerances. These have to be individually weighed to achieve optimum performance. However, a good asset allocation portfolio manager can help you achieve inflation-beating returns over the long run. That’s a win in World Cup year or any other year for that matter.”

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Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours

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[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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