Achieving balanced investment in volatile markets

In the current economic environment, volatility is a daily occurrence and investors are encouraged to diversify in order to achieve solid returns on their investments.

According to Paul Swanson, STANLIB Portfolio Manager (Balanced Funds), “Balanced funds offer risk diversification during periods of market volatility. Investors are encouraged to create a diversified portfolio through exposure to different asset classes, namely equities, bonds, properties and cash, with some offshore assets.”

“On the back of this, it is wise to have a mix of assets with negative correlations to diversify risk. When certain assets perform well, others will inevitably do badly (for example, when equities do well, bonds can sometimes perform badly). With a mixture of asset classes across a portfolio, overall risk should be reduced, providing a balanced return,” Swanson adds.

A global balanced portfolio solution provides investors with exposure to a number of asset classes, domestic and foreign, that are positively and negatively correlated. This diversification of assets provides investors with the comfort that their exposure to risk is contained without unduly compromising return.

Swanson believes the key to a successful global balanced solution is to combine asset allocation expertise at the portfolio construction level along with stock selection skills at the individual asset class sub-level. “The strategy of a balanced fund is similar to that of a shopping mall, with anchor tenants holding key strategic locations within the mall, and line shops positioned around them.”

Within the ‘shopping mall’ of the STANLIB Balanced Funds, our ‘anchor tenant’ is equities. ‘Line shops’ consist of differing a weightings in property, bonds, cash and in offshore. The STANLIB Balanced Franchise is responsible for asset allocation decisions. However, the underlying asset classes within each balanced portfolio are managed by specialists in their field.

Asset allocation views have both a strategic and a tactical component. The strategic component is long-term and is based largely on macro-economic forecasts and how the different asset classes will perform under various conditions. While, the tactical component is shorter-term and is based on the realisation that asset prices may dislocate from their fundamentals, allowing opportunities to be exploited.

“Once the asset allocation views have been formulated, the underlying asset classes are then managed by the relevant specialist. This collective outcome captures the all the extensive expertise available at STANLIB,” he adds.

Swanson demonstrates that there are various asset classes used to reduce the impact of market volatility at STANLIB:

* As at 23 November 2010

“Before constructing a portfolio, one should revisit the basic principle of investing: earning real returns over the long-term, with the ultimate intention of beating inflation. In order to achieve this goal, one would need to have some exposure to growth assets. Balanced funds have proved their worth time and again and rewarded investors with superlative returns and stability,” Swanson concludes.