What you can do in the face of lower lo­cal re­turns

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

With more pedes­trian re­turns ex­pected from lo­cal as­set classes, you should com­pile an in­vest­ment port­fo­lio with a range of al­lo­ca­tions to each as­set class and that suits your risk pro­file, Peter Brooke, Old Mu­tual In­vest­ment Group’s head of macro strat­egy in­vest­ments, says.

Such a port­fo­lio will give your in­vest­ment man­ager some flex­i­bil­ity to ad­just your ex­po­sure to the as­set classes in line with the op­por­tu­ni­ties in the cy­cles that are likely to char­ac­terise the mar­ket.

But John Kins­ley, the manag­ing di­rec­tor of Pru­den­tial Unit Trusts, ar­gues that rather than start­ing with a risk pro­file, you should first es­tab­lish the level of re­turn you re­quire from your in­vest­ments over the next few years. This will de­ter­mine the mix of as­sets nec­es­sary to pro­duce the re­quired re­turn, and then you can check what risks that as­set mix will en­tail, he says.

If the risk level is un­ac­cept­able, you will have to ad­just the re­quired re­turn. Sim­ply start­ing with risk does not ad­dress the re­turn ex­pec­ta­tions of the in­vestor, Kins­ley says.

Brooke says: “With most as­set classes cur­rently fairly val­ued rel­a­tive to each other, there isn’t an ob­vi­ous ‘big op­por­tu­nity’ for ex­cep­tional re­turns by be­ing over­weight in a par­tic­u­lar as­set class.

“For in­vestors, this also means that as long as they are in­vested ac­cord­ing to the cor­rect risk pro­file, they shouldn’t have to worry about short-term switch­ing or mar­ket­watch­ing. Per­haps th­ese ‘bor­ing’ con­di­tions are good, as in­vestors can fo­cus on fol­low­ing their long-term plans af­ter the roller­coaster ride of the last two years.

“In the short term, it’s im­por­tant to re­mem­ber that the lo­cal eq­uity mar­ket has just en­joyed a 32-per­cent gain in share prices in 2009 and its largest-ever an­nual in­crease in price-earn­ings ra­tios, an as­tound­ing 82 per­cent.

“In 2010, the mar­ket should ben­e­fit from a re­cov­ery in com­pany earn­ings, with at least a 25-per­cent earn­ings growth, but this is largely al­ready in the price.”

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