It’s all about balance

Roné Swanepoel, Business Development Manager at Morningstar Investment Management SA

Diversification doesn’t necessarily mean variety

“The most important thing you can have is a good strategic asset allocation mix. So, what an investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments….we don’t know that we’re going to win. We have to have diversified bets.” – Ray Dalio.

We all aspire to achieve balance in many parts of our life – be it in our personal life, at work, with family time, our diet or even exercise. Similarly, the world is made up of different balancing factors needed not only for it to survive but thrive. Crops need both rain and sunshine to grow, our economy needs both buyers and sellers to thrive and we all need a good night’s rest after a hard day’s work.

In the same way the world needs and thrives on these balancing factors, so too do investments. Managing an investment portfolio is a constant balancing act, whether it be the allocation between cash and equities, local and global markets or even active and passive fund managers. History has shown us that a balanced and diversified approach to investing can help navigate turbulent markets.

Why do investors need to diversify?

The need for diversification reflects the fact that the future is uncertain. This has become particularly evident in 2022 with this year’s market environment proving unusually tough for most asset classes, both locally and globally.

The FTSE/JSE All Share Index has seen a close to 6% drop year-to-date (as of 31 October 2022) in rand, and local bonds have also generated negative performance. Globally, bonds are generating some of their deepest losses in decades.

If an investor had invested in a 60/40 portfolio consisting of equities (60%) and bonds (40%) they would have limited their losses year to date just with the help of naive diversification between the two asset classes.

If we look at the Morningstar Adventurous Portfolio, the portfolio consists of more than eight different asset classes, with the portfolio allocation consisting of –

• 4% local property
• 4% local cash
• 22% local bonds
• 34% local equities and,
• The remainder of the portfolio is invested in global equities, global bonds and global property.

An investor who invested in the Morningstar Adventurous Portfolio would have experienced a return of -0,5% highlighting the fact that smart diversification has buffered some losses on a year-to-date basis.
This negative return might not seem favourable when viewed in isolation, however, as can be seen in the graph below, given the current state of the market, the picture could have been a lot worse…

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