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Category Investments

Diversification

01 November 2004 Angelo Coppola

During the year to date local markets have outperformed offshore markets by 13% in rand terms.

Theo van der Lingen of PSG Fund Managers says however, that we should not forget that offshore diversification remains as important as ever. Spreading investment capital across the globe into different investment options is an important strategic initiative.

The rand is currently at a strong level. With a reputation as one of the most volatile currencies in the world, wise investors will acknowledge the present opportunity to hedge their currency positions.

One of the key advantages of a global portfolio is the flexibility it can offer to move opportunistically and in timely manner between asset classes, regions, sectors and currencies.

Investment solutions are provided for the investor in the form of portfolios that are constructed for different risk profiles. The allocation strategy determines different risk/return characteristics.

Through diversification we produce good risk adjusted returns from the following asset classes:

1. Equities
2. Bonds
3. Property
4. Cash
5. Alternative instruments
6. Physical commodities (gold, etc.)

The management of these portfolios entails tactical swings to overweight and underweight positions in these asset classes. To assist in this management process, economic and market conditions are analyzed by means of economic models.

Economic analysis and forecasting also assist in managing the regional aspects of portfolios. The importance of regions to overall investment returns has varied significantly over time.

Over the past two decades, a strategy of investing in those regions that had outperformed in the previous five years would not have achieved much success.

From 1984 to 1988, for example, Japan was the best performing market followed by Europe, in terms of annualized dollar returns. In the following five years, from 1989 to 1993, Japan was the worst performing region and Latin America took the lead.

In recent years, sector influences have largely surpassed regional factors in asset allocation decisions. Global equity returns have increasingly been driven by sector exposure. From a universe of 14000 managers, we manage this third leg of allocation by choosing the best managers in a specific region to tactically select the best sectors.

Currency management of offshore portfolios is the last and very important leg of asset allocation. We do not attempt to time the currency markets by buying at cheap valuations and switching once we expect a change in the value.

We diversify currency holdings between the major nations of the world. Exchange-rate movements can complicate straightforward investment decisions when global assets are being selected.

If the currency depreciates by more than the asset appreciates, the end result is a negative return. Our strategic currency allocation is as follows:

US - 40%
Europe - 30%
UK - 10%
Japan - 10%
Other - 10%

Health warning: Before making investment decisions for your clients, speak to experts on the area you are thinking about… and get a second opinion if you are unsure.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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