Take a risk to earn higher returns
But be prepared for market volatility
INVESTORS who take risks – especially during global and local uncertain events such as concerns around a China-US trade war Brexit or the recent elections – are likely to earn better returns, according to Fareeya Adam, head of retail product solutions at Momentum Investments.
Adam said the standard risk-return investment trade-off can even become skewed by the sheer unpredictability and disproportionate macroeconomic importance placed on a single sovereign event.
“The way we see both local and global market uncertainty playing out is that lots of people move towards guaranteed solutions and they look for solutions where they don’t take too much risk.
“Obviously, some risk is important. The more risk you take the more likely is it to earn a better return than a guaranteed return but it can always go both ways and that’s where the bigger risk trade-off is coming through,” said Adam.
She said for local investors it comes as no surprise that fears over land expropriation, the potential loss of capital and fluctuating global markets are at the forefront of discussions and with these uncertainties at play, creating a basket of diverse solutions is a top priority.
“Local investors are increasingly seeking diversification through global exposure to achieve growth while maintaining a degree of certainty.
“Every individual’s investment needs are different. It is therefore critical that each investor is exposed to the right type of investment solution for their specific risk appetite,” said Adam.
She also explained why structured products have earned a bit of bad reputation among high-return seeking investors over the years.
Investors needed to understand what they were buying, what were the risks and the benefits involved.
She said it was critical to understand how a structured product would behave in different circumstances.
“So if the markets are doing badly, then investors look at the market value of their structured product and see that this market value is falling.
“What they forget is that by sticking to the term which is usually five years, they won’t be exposed to that volatility…
“Investors are making almost impulsive decisions during the term and forget that the purpose of the structured product is to protect them against negativity and the worst possible thing that somebody can do at that time is to withdraw their capital. It’s important for clients to understand what risks they are taking on,”
She said that any degree of certainty of return is characteristically perceived to limit an investor’s potential for return.
“The thing about certainty is that as much as people want it, any astute investor will tell you that the more risk you take, the more upside for return is possible,” said Adam.
She added that this was the driving motivation behind the newly launched Momentum Enhanced Growth Option, a structured investment product which challenged conventional investment thinking that assumes that higher returns are only possible through exposure to higher risk.
“We wanted to create a product suited to the local investor looking for growth through exposure to a global index, without the risk of losing money. By offering a secured return of 15 percent over five years, and an enhanced allocation of 3 percent upfront… the investment plus unlimited enhanced growth potential through a multiplier effect offers the best of both worlds,” said Adam.
◆ The Momentum Enhanced Growth Option is available to individual investors and trusts, with a minimum investment of R50 000.
For more information, see momentum. co.za/MEGO.