Constructing an appropriate unit trust investment portfolio always begins with your individual financial objectives. These objectives are linked to a number of risk vs. return relationships. The higher your return objective, the higher the risk profile will be.
The graphic below illustrates the connection between risk and return when investing.
(CPI above stands for Consumer Price Index, so all returns are pegged to inflation)
Except for the objectives on each end of this table (namely “No capital risk” and “Maximum risk”), the investment solutions will include different combinations of capital protection (interest-bearing investments/bonds) and growth (shares and commodities).
This is known as Asset Allocation
Asset allocation is the mix of different components – asset classes – of a fund, in order to meet a stated investment objective.
The term “asset classes” refers to different financial instruments such as shares, property shares, bonds, money market instruments, commodities and hedge fund instruments.
The underlying mix of assets in any fund will be a significant factor in how the fund performs.
Our approach at Netto Invest has been to include more than one fund for any given objective in order to capture the benefits of more than one asset allocation decision.
What are the benefits of using more than one fund?
Enhanced diversification
Using more than one investment fund lets you access a broader range of assets and asset allocation strategies. Each fund manager employs a unique investment philosophy, research process, and approach to balancing equities and fixed-income securities. By combining funds, you mitigate the risk of being overly reliant on a single fund’s strategy, which could underperform under certain market conditions. This diversification ensures that your portfolio is exposed to various sectors, geographies, and asset classes, which enhances its stability.
Risk management
No single asset allocation process or fund manager is immune to market volatility. Different funds react differently to economic events, interest rate changes, or geopolitical risks, because of different asset allocations. By investing in more than one fund, you spread your exposure across a variety of risk management approaches. For instance, one fund may lean towards conservative bonds during turbulent times, while another may capitalise on equities’ potential rebound. This can help to cushion your portfolio against losses.
Access to specialised expertise
By investing in more than one fund, you benefit from the insights and strategies of more than one management team. One manager may excel in identifying growth opportunities in emerging markets, while another might focus on dividend-paying equities or high-quality bonds. Leveraging diverse expertise increases the likelihood of achieving consistent returns across different market cycles.
Reduced dependence on a single manager or strategy
Even the most experienced fund manager can allocate capital to areas that don’t work out or face periods of underperformance. By spreading your investments across multiple balanced unit trust funds, you reduce your reliance on any single manager’s decision-making or specific investment strategy. This reduces the impact of any one fund’s poor performance on your overall portfolio, providing an added layer of security.
Improved long-term returns
Different funds with distinct asset allocation strategies can complement each other, resulting in smoother performance over time.
Adding nuance: combining single AND multi-manager funds
Our Netto Invest investment strategy is to include a combination of single manager funds, alongside one allocation to a multi-manager fund for any given risk/return objective.
A single manager will manage all the asset classes in their fund, where a multi-manager will use the best manager for each underlying asset class. A multi-manager will also be able to use a mix of passive and active investments in the portfolio to capture additional opportunities.
The use of the multi-manager component has been a feature of our rand-based strategies for a number of years now, and with the recent introduction of the offshore US$-based multi-manager strategies we expect there will be greater opportunity and diversification in the offshore arena.
Summing up the approach
Investing in more than one fund with diverse asset allocation processes is a strategic move that is engineered to enhance diversification, reduce risk, and improve the stability and probability of expected outcomes.
This approach allows you to leverage the strengths of multiple fund managers, adapt to varying market conditions, and create a more resilient portfolio. While the strategy requires thoughtful selection and monitoring of funds, the potential benefits far outweigh the effort, making it a compelling choice if you are an investor aiming to achieve financial stability and growth.
Remember to consult with a financial advisor to ensure your investments align with your personal financial goals and risk tolerance.
Your Netto Invest CERTIFIED FINANCIAL PLANNER® professional can offer objective advice and improve the likelihood of achieving your long-term financial goals.
By Ian Beere, CFP® CA(SA)