Strategic Asset Allocation is the name given to the matching of various types of expenses with investment asset classes. At JWR we allocate our clients’ funds as follows:
Cash
Money that will be required to pay for purchases over the next three to four years will be allocated to cash. Cash does not beat inflation after tax is deducted from the interest earned, but it does provide a very stable return on which budgets can be built.
Balanced funds
Money required for expenses from year four to year nine will be invested in Balanced Funds. These Funds invest in Cash, Bonds, Property and Equity. There is usually a 30% allocation to international equity so there is a degree of protection against a weakening rand built into these funds.
Equity Funds
The money required for expenses expected only ten years from now will be allocated to Equity Funds. Currently we allocate in the region of 40% to international equity funds but given the structural problems in South Africa, as well as the changing investment environment, we prefer to up this percentage to between 50% and 80%, depending on the specific clients’ needs. Equity can be the most volatile of the various asset classes and time is needed for this volatility to balance itself out. It is, however, the best hedge against inflation over the longer term. It goes without saying that the older you get, the bigger the need for income security and thus the importance of the cash and balanced segments of your investment portfolio. However, if you are in the advantageous situation where you have more capital than you will spend in your own lifetime, your excess capital should not be invested in cash, but rather in equities, because your estate will benefit from the better returns over the longer period.
Currently, South Africa is in a mess and so is the EU. This means that shares of companies trading in these areas are very cheap and thus due for a positive correction if and when the mess is sorted out. On the flip side, the USA has a very strong economy, making some sectors of their market very expensive. The important thing for you as an investor is to realise that owning SA companies will give you a remarkable outperformance if and when things get sorted out in this country, but until such time, volatility and rand weakness will be your bedfellow. Our opinion is that a stable, inflation-beating equity performance over the longer term is preferable to a very volatile one. We also believe that there has been a paradigm shift over the past few years with the rise of the digital age and fourth industrial revolution, which will have a profound impact on our lives in the years to come. Most South African companies will be left out of the loop and it will benefit shares in countries like the USA, South Korea and China.
At this time, there is more cash in the hands of companies and individuals than ever before owing to the negative investor sentiment worldwide, and especially in SA. So as Hemingway wrote so eloquently, “How do you go bankrupt? …..first gradually and then suddenly”, so too can the inverse happen when the performance in shares start going up gradually, and then suddenly. Do not stay in cash too long with longer-term capital.
