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Financial planning and portfolio construction re-imagined

22 April 2024 Adam Reeves, Senior Specialist Investment Analyst, FIFM at Absa Corporate and Investment Banking
Adam Reeves

Adam Reeves

Despite having an incredibly advanced banking and financial services sector, the South African investment landscape is inefficient when it comes to trading costs and advice fees. This impacts returns for investors as it weighs on long term investment performance.

In addition to the above-mentioned performance detractors, the following question also begs asking:

In an increasingly commoditised investment industry, is doing the same thing as everyone else in the industry, adding any value to the end investor?

This is the reason why Absa Fund Linked Solutions (Absa FLS) created innovative new tools to not only enhance the experience of the client of a financial advisor but to also provide financial advisors with the ability to differentiate themselves in the market.

Absa FLS notes provide advisors with a sophisticated range of investment strategies that allows them to optimally manage risk and return objectives within their model portfolios for their clients such as lowering the risk of capital loss or managing the impact of market volatility on their returns.

Like a traditional structured product, the investor will face Absa as a counterparty, and it is important to note that the investor does not directly own the funds in the portfolio. They will receive the performance of the funds subject to any strategies implemented on it by the advisor

However, unlike a structured product where many investors subscribe to a single new issue for a specific pay-off that is relatively static, each investor will be issued their own investment note. Furthermore, these notes do not have an expiry date, making long-term planning more effective.

The Absa FLS note therefore allows investors to have a unique blend of exposure to the following components in a single investment:

- Standard Collective Investment Schemes (Long Only) for either Single or Multi-Asset exposure
- Fund of Funds
- Feeder Funds
- Retail Hedge Funds

Being able to efficiently rebalance or change the weightings of these underlying exposures enables advisors to solve for a specific event risk (for example national elections), changes in Market Phases (growth or recession), clients’ personal investment philosophy changes (considering emigration) or general use in a tactical allocation change.

As part of optimising the risk return objectives of a model portfolio, financial advisors are also in the position to not only use protection strategies, but they can also apply leverage to the portfolio or to the individual underlying components of the model portfolio such as an exposure to balanced funds. For a financial advisor, you now have a suite of tools which enables you to make strategic and tactical decisions more efficiently on your model portfolio. These tools allow for greater certainty of an investment outcome and minimises hesitations around portfolio rebalancing.

Importantly, this innovation is scalable and accessible. Historically, structured products were the exclusive domain of high-net-worth individuals, family offices and certain asset managers. Now we can utilise technology and financial innovation to make these products available to investors s that would historically be deemed below viable investment thresholds.

A question we invariably are asked is whether a bank is the right institution for developing this kind of innovation in the investment space. To this, we answer unequivocally: “Yes.” Where else will you be able to have this much flexibility to manage risk and return objectives in such a tailor-made investment?

This type of innovation does not exist in the conventional market place where advisors can only buy or sell to affect their views.

Absa FLS currently sits with R1.6bn in Assets Under Management (AUM) and we are targeting approximately R3bn by the end of the year. The Absa FLS team have invested over 3 years in developing the infrastructure for these unique solutions and we have worked closely with some of our early adopters to refine and enhance the offering.

We actively encourage financial advisors to submit their model investment portfolios and run it through our scenario planning tools across different market periods – we believe they will be pleasantly surprised with what can be achieved by implementing these new tools.

We believe that our FLS suit of strategies and tools will change the way that financial advisors do business as we are at the cutting edge of technology and financial innovation in South African investment markets. We look forward to working with advisors, asset managers and Discretionary Fund Managers (DFMs) to build a more certain investment outcome for their investors.

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