AS­SET AL­LO­CA­TION –

Finweek English Edition - - Online -

the divi­sion of in­vest­ment money to dif­fer­ent as­set classes, chiefly eq­ui­ties, bonds, cash and real es­tate – is a key in­vest­ment de­ci­sion. The prob­lem for re­tail in­vestors is that there’s “no sim­ple for­mula to find the right as­set al­lo­ca­tion for ev­ery in­di­vid­ual,” says Prieur du Plessis, chair­man of the Plexus Group.

He adds an in­vestor’s se­lec­tion of in­di­vid­ual se­cu­ri­ties is secondary to the al­lo­ca­tion of as­sets. “The divi­sion among as­sets is the prin­ci­pal de­ter­mi­nant of your in­vest­ment re­sults.” Some­one without spe­cial­ist knowl­edge or the help of a fi­nan­cial ad­viser will prob­a­bly bat­tle to make an ac­cu­rate de­ci­sion about al­lo­ca­tion. But there are as­set al­lo­ca­tion unit trust funds where the fund man­ager will make the de­ci­sion. Those are in five cat­e­gories at­tempt­ing to ad­dress dif­fer­ent risk ap­petites, in­vest­ment hori­zons and ob­jec­tives.

“At in­cep­tion of the port­fo­lio a base pol­icy mix – namely, the long-term strate­gic as­set al­lo­ca­tion of the fund – is es­tab­lished on ex­pected re­turns,” says Du Plessis. “As the value of as­sets can change due to mar­ket con­di­tions, the port­fo­lio con­stantly needs to be re-ad­justed back to the strate­gic as­set al­lo­ca­tion. That en­sures the risk and re­turn pro­file of the fund re­mains the same.”

How­ever, fund man­agers can cre­ate ex­tra value in an as­set al­lo­ca­tion fund by tak­ing ad­van­tage of cer­tain sit­u­a­tions in the mar­ket, such as pric­ing anom­alies or ex­pected out­per­for­mance from cer­tain as­set classes. Du Plessis says such tac­ti­cal as­set al­lo­ca­tion de­ci­sions are typ­i­cally short term and once achieved the man­ager will re­turn to the orig­i­nal strate­gic as­set mix.

How­ever, the im­por­tant ques­tion is how suc­cess­ful man­agers are at mak­ing tac­ti­cal as­set al­lo­ca­tion de­ci­sions. Re­search by Plexus As­set Man­age­ment re­veals some star­tling facts. For ex­am­ple, Du Plessis says the as­set al­lo­ca­tion funds that can re­duce eq­uity ex­po­sure to zero – pru­den­tial low eq­uity, pru­den­tial vari­able eq­uity and flex­i­ble funds – pro­vided lit­tle pro­tec­tion against the sharp de­clines in eq­uity prices last year. “Of the 37 pru­den­tial vari­able eq­uity funds only one achieved a pos­i­tive re­turn over one year (to 29 Fe­bru­ary 2009, close to the most re­cent mar­ket bot­tom). Of the 51 flex­i­ble funds only four re­alised pos­i­tive re­turns.”

A fur­ther sig­nif­i­cant find­ing is that flex­i­ble funds, which can al­lo­cate 100% of the port­fo­lio to eq­ui­ties, gen­er­ally un­der­per­formed the pru­den­tial vari­able eq­uity sec­tor, which can only in­vest up to 75% in eq­ui­ties.

In­di­vid­ual fund per­for­mance also varies widely. Best pru­den­tial vari­able eq­uity fund over one year had a pos­i­tive re­turn of 2,7%. Worst per­former in the same cat­e­gory was a neg­a­tive 30,2%. Sim­i­larly, best per­form­ing flex­i­ble fund was a pos­i­tive 5,1%, worst a

No sim­ple for­mula for the right as­set al­lo­ca­tion neg­a­tive 39,2%.

“Based on th­ese find­ings, in­vestors must re­alise the wider the in­vest­ment man­date and the more ag­gres­sively the port­fo­lio man­ager pur­sues it, the greater the chance of not achiev­ing the in­vest­ment ob­jec­tive.”

Du Plessis says it’s im­per­a­tive for in­vestors to un­der­stand the man­ager’s ob­jec­tive and the in­vest­ment strat­egy fol­lowed to achieve that. “If you’re un­cer­tain rather choose a fund that has the nec­es­sary re­stric­tions in place, in line with an as­set al­lo­ca­tion that suits your in­vest­ment ob­jec­tives and risk pro­file.”

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