Investor behaviour
Your journey as an investor started with a plan on day one. Uncertainty has the ability to make one forget about the plan which made so much sense initially. It is for this reason that it is necessary to look at the plan and the principles used to construct your portfolio to achieve your goals. The plan is important in times when uncertainty is high as the plan needs to keep us on track when doubts are creeping in. The plan is our unemotional compass which fulfills the silent role of a gatekeeper to prevent investors to implement bad investment behaviour based on emotion.
Going back to the plan
Your investment plan is based on the principle of diversification in the following ways:
- Asset Classes-Equities, Property, Alternatives,Bonds, Cash and offshore exposure
- Fund managers that are all selected through our vigorous selection process
- Different strategies and plans within a well-defined mandate
Given the current market environment it is sensible to discuss the different strategies in a multi asset class portfolio also known as a balanced portfolio. These portfolios are exposed to all asset classes and the strategies employed amongst others, can be identified as follows:
- 25% direct offshore exposure
- Strategic allocation to local and offshore fixed interest assets which are term dependant and highly correlated to interest rates
- Strategic allocation to property equity locally and offshore. Some of the bigger REITS in SA have exposure offshore which is beneficial in times when the Rand depreciates
- Strategic allocation to equities locally and offshore that generate dividends and capital growth. Some of the SA companies have offshore income streams which are an additional benefit in times when the Rand depreciates.
- Some of our managers also buy portfolio insurance to protect the portfolio in times of falling equity markets. We also include hedge fund exposure in some of our discretionary client portfolios and we will soon be allowed by regulation 28 to include it in pension fund portfolios as well.
Objectives of your plan
The objective of most investors is to stay ahead of inflation. The degree of outperformance needed by investors differs as risk profiles and personal needs differ. Our goal is to reach your investment goal by managing risk as explained above, with proper diversification and different strategies combined in one portfolio that is managed actively.
The biggest risk for your portfolio
One of the major risks of any portfolio is the investor him or herself. Investors have been observed in the past to display inconsistent behaviour in times when they need to be consistent. This behaviour is normally in highly uncertain times which drive a lot of emotions of investors. Investor’s reaction to higher volatility is many a times to get out of their investments as it makes logical sense to do something when you sense “trouble”. Although last mentioned behaviour seems sensible it is most of the time a critical investment mistake especially if the initial plan of the investment was solid and based on principles as described above. The price of reacting based on the emotion of fear is sometimes more costly than just bearing short term volatility and “uncertainty”. Please note that uncertainty is always in the investment equation and degrees of uncertainty might change over time, but it will always be present. The best way to manage uncertainty is to stick to a well-structured plan consistently. Consistency over the long term is the answer to uncertainty in the short term. Think about it: The market is an uncertain/ inconsistent environment. Inconsistent investor behaviour cannot yield profits over the long term based on its inconsistent behaviour. One variable (investor behaviour) plus another variable (the market environment) will not yield a constant result. Therefore, stick to the investment plan (be consistent) and focus on that which you can manage namely your fears and decide for yourself if those fears can be justified or not based on facts. We are constantly exposed to market commentators painting different pictures of doom and gloom relating to our country and everything that could and some claim will happen. Our experience of market commentators is that most are making a living by delivering commentary and very few of them are actually managing money successfully. It is worth one’s while to make sure you read articles from true market wizards and try and ignore the 99% of marketing wizards that keep the media noise machine going. There is an important difference between the two groups and knowledge of how to distinguish between marketing and a market wizard could serve any investor well when it comes to handling uncertainties in the financial markets.
What are your fears?
We are bombarded with negativity these days and it is quite possible for you to wonder what the relevance of some of these real world issues are on your portfolio. The below table summarises some of the fears in the minds of investors currently and the potential relation thereof to your investment portfolio.
|
What are you afraid of at the moment? |
Effect |
Relation to my portfolio |
| SA credit downgraded to junk status | · Bonds fell and the yields on Government bonds went up and the managers in our portfolios participated at the higher yields ensuring to lock in well above inflation yields for the future | · Falling bond values will create opportunity for managers to buy low and lock in high yields caused by the downgrade which is a positive for the part of the portfolio invested in bonds |
| Interest rates going up | · Yields on money market instruments will go up | · The fixed interest part of the portfolio will buy these instruments and lock in above average yields which is beneficial for your portfolio
· Financial companies like banks can benefit from higher interest rates as it is their primary income from loans. Your portfolio is exposed to bank shares and is serving us well since the beginning of February 2016. |
| The Rand loses field against the USD | · Exporters in SA will benefit and importers will suffer
· Our offshore debt will increase in ZAR terms and is not good for the economy as a whole. |
· Your portfolio is 25% exposed to offshore assets. The weak rand will benefit that part of the portfolio directly
· Most shares held in your portfolios are exposed to USD and other offshore income streams. That means the Rand returns of these so called rand hedge shares are partly protected against the weaker rand. |
| Inflation go up | · Higher CPI will be combated by the SARB with higher interest rates which. | · Higher CPI is combatted with higher interest rates which is beneficial to the fixed interest part of the portfolio as explained above. |
| The ZAR appreciates against major currencies | · Local small and mid-cap companies are at attractive valuations currently in relation to large cap companies which spell opportunity for investors from abroad to invest in our market.
· A strong ZAR could also be caused by foreigners buying our government and corporate bonds |
· Large Multinational companies will take strain when the ZAR appreciates whilst local smaller companies will benefit. Last mentioned does form part of our portfolios as they are trading at attractive valuations currently
· More interest in our bonds could drive bond yields down and increase the appetite for risk assets like equities and property |
The intention is to help you to think of the risks identified as potential opportunities in your portfolio based on your understanding of the different strategies implemented in your portfolio as explained above. Chances are good that some of these risks will be transferred in profits in your portfolio by one or more of the strategies employed. It is also true that not all strategies employed will work all the time and that one should be at peace with that. This is probably the key principle of diversification. If one or more strategies are successful chances of others to be unsuccessful is high due to the low correlation between the different strategies. The ultimate goal is to generate long term returns within a disciplined band of volatility and reaching your investment goals at the end. The road to that goal is not priceless and without volatility, there isn’t such thing as a free lunch, the price in this case is to stay focused and disciplined and in line with the plan.
Recommended sanity test
So the next time you read an article that highlights a certain factor that investors should be fearful about make sure that you go through this sanity test before entertaining any activity surrounding your investment portfolio:
- Is the person writing the article a marketing wizard? Does he make a living by writing articles or does the person have a successful record of managing money? If yes, be careful.
- Does the article leave you fearful on the one hand or maybe greedy on the other hand? If yes, be careful as the writer might be guilty of being biased towards a certain idea or theme. Even if the idea is sound, one should never be biased towards one idea as our default position as investors should always be to be objective and not emotionally too attached to any one idea.
- Does the writer consider the other side to his or her opinion objectively? If no, be careful.
- Does the article provide a balanced, well researched solution to the risks named? If no, be careful.
