Diversification of your assets alone isn’t enough

“The old cliché is don’t have all your eggs in one basket, but you also need to understand that you can’t only have eggs,” says Sasfin Wealth’s Philip Bradford.

It’s important to understand the interplay between asset classes in a multi-asset portfolio. Although investors ideally want all the building blocks in their portfolio to do well long term, they don’t want assets to struggle.

Conventional wisdom dictates equities will outperform other asset classes long-term. So it’s often assumed they’re the only asset class to use.

But history doesn’t necessarily support this, Bradford says. While SA has been the world’s best-performing stock market over the last 100 years, other asset classes have also done very well.

Bradford says many investors argue they’d have been in a more favourable position if they’d gone offshore 30 years ago, yet in many instances investors would’ve been better off investing in rand assets. While the rand depreciated against the dollar over the period, high-yielding local assets like cash and bonds have done better than some foreign asset classes.

Currently, local cash and bonds provide investors with a significant pickup over global cash and bonds; it makes sense to get a strong “base load” return from these assets that are already comfortably beating inflation.

“In the local market, if you can currently get inflation plus 4% or 5% out of bonds – which will protect you when the equity market falls – what it does allow you to do is to move between those asset classes when equities underperform. Bonds are like an insurance policy that pays you a premium.”

If equities pull back, other assets may still be doing well and the portfolio can be rebalanced.

This adds much value longterm. It also allows investors to invest “more opportunistically” into equities.

“I wouldn’t say the right asset allocation is to be in equities and then when things look bad go into cash or bonds. If anything, there is a very strong argument over the longer term that your fixed income assets (particularly local ones) can give you compounding growth because they are currently … offering decent real returns with a high degree of certainty.”

With equities, he suggests looking at things with a global mindset and being aware that currency markets’ vagaries and movements will impact those returns. But over time he believes there are opportunities you can’t get in SA.”

He says for local investors looking to increase offshore exposure it makes sense to focus on equities, as investors are taking a lot of currency risk.

However, other local asset classes like fixed income and local property offer very high yields compared with the global market. – Moneyweb