Effective asset allocation and patience rewards investors

For most investors, investment success is based on the basic principle of effective asset allocation and patience. In fact, research has shown that the main factor determining the investment return from a multi-asset class investment portfolio is the long-term strategic asset allocation. Investors need a mix of equities, bonds and cash for an optimal portfolio, explains John Kinsley, Managing Director of Prudential Portfolio Managers Unit Trusts.

“Too high an allocation to equities and your portfolio may be subject to a big short-term drop in value when the market is volatile over the short term; and an appropriate allocation to bonds is rewarding if you have patience,” he adds. “For short-term goals, investors should make sure they are taking appropriate risks. It makes no sense to invest money that you may need within the next two years in equities. Cash or bonds where you are more likely to preserve your capital may be prudent – despite the risk of inflation reducing the purchasing power of your money. For your long-term financial goals, where you can afford to stomach shorter-term ups and downs, you may consider a higher allocation to equities.”

“The Prudential Balanced Fund provides investors with a well-diversified portfolio which helps you take advantage of positive movements in asset classes and limits your potential for loss,” says Kinsley. The Fund’s portfolio (as at end of May 2011) is allocated as follows: 45.4% in local equities, 23.1% to international equities, 14.7% to local and international cash, 13% to local fixed interest and 3.8% to property.

“This shows that with one fund, you can benefit from well diversified exposure to both local and offshore asset classes,” explained Kinsley. “For example, over the month of May, offshore bonds were the star performing asset class, driven by falling yields in all developed markets and accentuated by the rand weakness over the period.”

“In contrast, local equities were a drag on performance, which followed the global trend and dipped during the month. Local bonds continued to perform in May with 10-year bond yields moving 0.14% lower to end the month yielding 8.33%. Moves in the US bond market would appear to be continuing to drive the local market with the move mirroring the move lower in US 10 year bonds, as they did in April this year” Kinsley commented.

Basic principles for investment success
Prudential Portfolio Managers suggest some basic principles for investment success.

1. Keep your fund selection simple by staying with a diversified solution fund like the Prudential Balanced Fund. Start early and adopt a ‘buy and hold’ strategy.
To benefit from the power of compound growth, an investor needs to invest early and stay invested for long enough for this to have a positive impact on their money. Prudential Portfolio Managers’ Balanced Fund combines the company’s core skills of managing equities, bonds, cash and property using its Tactical Asset Allocation process so that investors don’t have to worry about how much to allocate to any of the asset classes: both now and when asset class valuations change over time.

2. Limit the extent to which you let market noise and commentary steer you off course.
“Successful investing requires long-term commitment so it helps to limit how much you listen to day-to-day market commentary,” says Kinsley. “We select individual securities according to our prudent value investment philosophy, which has a proven track record of delivering benchmark beating performance, in both bull and bear markets without excessive risks,” says Kinsley. “Regardless of whether the market is up or down, we apply our prudent value investment philosophy of researching and focusing on current valuations of securities in an effort to benefit from any difference between current prices and long-term normalised valuations. While the application of this philosophy may differ between each asset class and between different types of portfolios, the investment management philosophy remains consistent,” he explains.

3. Become a disciplined regular investor by investing a small amount of money every month and benefit from rand-cost averaging which reduces the risk of buying at the top of a market cycle.
It is impossible to anticipate the movements of the market – both up and down, so regular disciplined savings can help investors make the most of their money.

And if you don’t wish to make asset allocation decisions yourself, enlist the guidance of a professional financial adviser or delegate this decision to an investment manager by choosing a balanced fund.

“Prudential have a successful track record of managing balanced funds: locally and globally. Our domestic and global balanced funds have been established as leading funds in the South African market, with superb long-term track records. Our access to international resources and our key areas of skill contribute to consistent top quartile performance as measured against our peers,” says Kinsley.

Prudential Portfolio Managers have shown over time that instead of stellar returns one year and bottom quartile performance the next, the disciplined application of its philosophy generates steady incremental returns.