Take con­trol of build­ing your in­vest­ment port­fo­lio

We of­fer some ad­vice to in­vestors when it comes to struc­tur­ing their port­fo­lios and how to choose the ma­te­ri­als with which to build a solid in­vest­ment foun­da­tion.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za is a port­fo­lio man­ager at PSG Wealth.


fas­ci­nat­ing to hear all the dif­fer­ent opin­ions when it comes to build­ing prop­er­ties – whether it’s start­ing from scratch or just an ad­di­tion to your ex­ist­ing prop­erty. Some will tell you that it’s bet­ter to pay ex­tra for some­one ex­pe­ri­enced to man­age the build on your be­half, while oth­ers will tell you that manag­ing it your­self will save you money. What­ever you de­cide, you will be left with a few ex­tra grey hairs and you will have learnt so much in the process that you feel you could just as well have done the build­ing your­self. The re­al­ity is that you don’t phys­i­cally have to lay bricks and ce­ment in or­der to build. By hir­ing ex­pe­ri­enced builders and elec­tri­cians for each re­spec­tive task, for ex­am­ple, you will have greater con­trol and save money in the process.

In­vest­ments are based on the same prin­ci­ple in many ways. In­vestors world­wide have be­come much wiser and are able to man­age their own share port­fo­lios via the in­ter­net these days, to name but one ex­am­ple. But when we look at risk ver­sus re­turns on this in­vest­ment, many may re­alise that al­though this type of in­vest­ment may pro­vide higher-than-nor­mal re­turns, it comes at a much greater risk.

The first step in tak­ing con­trol of your to­tal in­vest­ment port­fo­lio is to take a good look at your per­sonal risk pro­file. In­vestors can sel­dom af­ford to be in­vested in shares only, es­pe­cially in the more risky in­vest­ment en­vi­ron­ment we cur­rently find our­selves in. Pen­sion­ers, for ex­am­ple, who de­pend on a monthly in­come and cap­i­tal sta­bil­ity, rarely con­sider in­vest­ing in shares and find money mar­ket with an ap­prox­i­mate 7% re­turn much more re­as­sur­ing. Af­ter tax, how­ever, these re­turns no longer look quite as at­trac­tive as they can barely keep up with the an­nual growth in in­fla­tion, which causes many of these in­vestors to seek com­fort in in­come funds to try and earn an ex­tra per­cent or two in cap­i­tal growth.

In­come funds are usu­ally rec­om­mended for in­vestors with a pri­mary need to pro­tect their cap­i­tal and a sec­ondary need for in­come gen­er­a­tion. To pro­tect in­vestors against cap­i­tal ero­sion, these funds mainly fo­cus on the more con­ser­va­tive as­set classes such as money mar­ket, bonds, prop­erty and high-div­i­dend shares.

The money mar­ket and bonds en­sure cap­i­tal preser­va­tion, which is sup­ple­mented by con­ser­va­tive in­ter­est and coupon pay­ment. Prop­erty shares and high­div­i­dend shares of­fer a more risky ad­di­tion to a con­ser­va­tive in­come fund which, in turn, of­fers less se­cu­rity in cap­i­tal preser­va­tion, but de­liv­ers a higher in­come and tax-ad­van­ta­geous div­i­dend in­come. Both as­set classes also pro­vide the fur­ther ad­di­tion of pos­si­ble long-term cap­i­tal growth. The op­ti­mal mix of these four as­set classes will be de­ter­mined by the na­ture of the fund and the fund man­ager’s strat­egy, but cap­i­tal growth is much more lim­ited com­pared to shares and bal­anced funds.

When we take a look at the list of avail­able South African in­come funds (unit trusts), we see that dur­ing the past two years’ more volatile mar­ket con­di­tions, in­come funds still out­per­formed money-mar­ket in­vest­ments by roughly 2.5% and, al­though it may have trou­ble in keep­ing up with growth in­vest­ments like shares over the long term, it per­formed a mere 2% weaker against the FTSE/JSE All Share Index over this short pe­riod. What’s more is that the volatil­ity wasn’t ex­ces­sively higher than money mar­ket, of­fer­ing the more con­ser­va­tive in­vestor some peace of mind over the past two years.

My mes­sage this week isn’t aimed at con­vinc­ing in­vestors that in­come funds are bet­ter than other funds or in­vest­ments, but rather to of­fer an al­ter­na­tive port­fo­lio build­ing block to in­vestors who nor­mally find sal­va­tion in 100% money-mar­ket in­vest­ments, or who are cur­rently con­cerned about our ex­tremely high-priced stock mar­ket.

In­come funds

are usu­ally rec­om­mended for in­vestors with a pri­mary need to pro­tect their cap­i­tal and a sec­ondary need for in­come


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