Category Investments

Calculated risk-taking is back in style, says Absa Investments

18 October 2010 Absa Investments

Investment risk-taking is on the increase – sometimes among conservative investors who have traditionally been chronically risk-averse.

The trend has been noted by Absa Investments, an asset manager known for its value investment style and preference for longer timeframes and strategic asset allocations to balance market risk. As such, it attracts many clients whose main goal is inflation-beating performance and steady returns.

“Even clients with relatively low risk tolerance are now looking for higher returns, despite some additional risk,” says Wayne Dicks, General Manager Absa Investments: Unit Trusts.

“The change has been evident for some months, but the September rate cut appears to have been the last straw for some ultra-conservative savers. They now realise that they are fighting a losing battle if they rely simply on cash returns to maintain their lifestyle or to try and keep abreast of inflation.”

Dicks says many workers may have received wage increases barely above prevailing inflation and those living on fixed incomes have had their ‘remuneration’ cut in half by falling interest rates. Among the hardest hit are pensioners.

The Reserve Bank’s Monetary Policy Committee has cut rates eight times since December 2008, bringing the repo rate down from 12% to 6%. Inflation has also fallen and is expected to average 3,7% in the third quarter.

“The problem for old-fashioned savers is that inflation is still higher than the returns they are likely to get on vehicles like savings accounts and fixed deposits,” says Dicks.

“For this type of saver – the person with inherent distrust of markets – the current interest rate climate has been a wake-up call. The penny has dropped. Without a degree of market exposure, their money will lose value and they will be unable to maintain living standards.

“Some cautious savers believe current policy is perverse as low rates reward those who spent recklessly as it’s now easier to pay off debt. Yet those who save a little in the bank month by month are penalised by low returns. They can’t correct this anomaly without some risk. It goes against the grain, but the strategy of waiting things out has ceased to be an option.”

Popular alternatives to traditional bank-type savings are money market, property and income funds (these products use bonds, preference shares, money market instruments and listed property shares to deliver higher returns). Other savers took on a little more risk by exploring asset allocation funds, an investment that relies on a mix of asset classes, including equities, to beat inflation.

“Often, judicious risk-taking is justifed,” adds Dicks. “But there is a danger that disappointed savers will go from one extreme to the other and abandon ultra-caution for high-risk options in an attempt to make up lost ground.

“Jumping from the frying pan into the fire is no solution. A balanced approach usually makes more sense. The good news is that you can beat inflation in the long term, but you need to be patient and disciplined. It is recommended that the guidance of seasoned investment professionals be sought to do it.”

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