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Constructing your portfolio is like choosing wine

Matching your investment options to your favourite blends.

Dear valued investor,

2020 has sure turned out to be one major plot twist in this journey of life! Once again, in South Africa, we always seem to add our extra curveball to the whole situation!

If haste toilet paper buying was not a sight to behold on its own, I couldn’t help but find the whole alcohol ban slightly amusing … When we think about it – selecting your drink of choice after a long day has a lot more in common with your investment portfolio then you might have thought.

Let’s start at the beginning. When the alcohol ban was put in place a few weeks ago, many people stocked up on supplies and ensured they were compiling enough provisions for the cold winter ahead. Many however did not and regretted as the prohibition would be lasting a little longer than first anticipated. Scrambling to make plans, very much reevaluating the friends you have made over the past few years – and why all of them are not wine farmers, becoming creative – with pineapples… I never really understood that one, to be honest.

Failure to plan is the first common mistake many investors make. Whether it’s starting to save for your retirement one day, ensuring you have an emergency fund in place, or ensuring you have the suitable risk cover in place to protect yourself and your family against death, disability or critical illness. We live in a generation of instant gratification – where it is becoming less and less relevant to think or worry about the future – until a crisis hits, and then it is too late.

Structuring a suitable investment portfolio, more specifically asset allocation, for your own needs compares very well to walking down the aisle, open Monday – Thursday (social distancing of course) and carefully selecting your favourite items.

  1. Let’s start with the alcohol-free options – you can choose from beer, wine or many alternatives I have yet to explore. Should it be for health, religious or environmental reasons – there are many options. Shari’ah-compliant funds are the first to go in your cart, Shari’ah-compliant funds are investment funds governed by the requirements of Shari’ah law and the principles of the Muslim religion. Shari’ah-compliant funds are considered to be a type of socially responsible investing. These funds have a few fundamental requirements that need to be met – excluding alcohol, pornography, gambling, military equipment, weapons and smoking. Earning interest is not allowed, and the interest earned will be donated to a charity. These principles make the funds more unique compared to the average fund available in the market – fees are mostly higher, and investment returns much lower compared to its peers in the market. There are different indexes available that are Shari’ah compliant, as well as different unit trust funds.
  2. With more investors seeking investment havens that align with their beliefs, more options are becoming available, for instance, impact investing. Environmental, social and governance (ESG) approved investment products are becoming more popular globally. This market has not become very big in South-Africa yet.

  3. The next option in our cart will be a low risk, conservative investment. Here we will be opting for a money market fund or a multi-asset income fund. Adding to the cart a bottle of crisp sauvignon blanc, elegant aromas of citrus, peaches and white chocolate. This is a short-term focus of one to two years, investment objective (summary of investment policy).
  4. The PSG Wealth Income Fund of Funds’s investment objective is to achieve income with some long-term capital appreciation as interest rate cycles allow. Investments, apart from cash and assets in liquid form, mainly consist of listed and unlisted participatory interest in collective investment schemes. The asset allocation will be actively managed to reflect the investment manager’s view of the relative attractiveness of cash, fixed interest and property markets. The fund operates within the constraints of Regulation 28 of the Pension Funds Act.

    Who should consider investing?

    Specific fund risks: The fund sits in the lower half of the risk/reward spectrum and investors should expect low fluctuations in markets. The risk of short-term monetary loss is low but not eliminated completely. The portfolio is primarily invested in domestic bonds and cash with a small exposure to equity and property. The portfolio is exposed to default and interest rate risks. Interest rate risk is the risk that the value of fixed-income investments tends to decrease when interest rates and/or inflation rise. Default risk is where the issuers of fixed income instruments may not be able to meet interest or capital repayments. Property shares may be included in the portfolio and can carry the same risk as investing directly in real estate which is subject to economic and political conditions, interest rates and tax considerations.

    The fund is suitable for investors who:

    • Want a regular income without consuming capital;
    • Are seeking returns greater than those provided by money market funds or cash and are comfortable with interest rate fluctuation;
    • Have an investment time horizon of at least two years.
  5. Walking further down the line we look for something with a little more body to it. Adding a merlot to the cart. Deep crimson with aromas of clove, vanilla, blackberries and sweet spice on the nose. A balanced taste for a balanced fund.
  6. PSG Wealth Moderate Fof

    The PSG Wealth Moderate Fund of Funds’s investment objective is to provide medium- to longer-term capital growth within an acceptable level of volatility during any market cycle. Investments, apart from cash and assets in liquid form, mainly consist of listed and unlisted participatory interest in collective investment schemes. The asset allocation will be actively managed to reflect the investment manager’s view of the relative attractiveness of cash, fixed interest, equity portfolios and property markets. The portfolio will not have an exposure of more than 75% in equity markets. The fund operates within the constraints of Regulation 28 of the Pension Funds Act.

    • Who should consider investing?

    Specific fund risks: The fund sits in the middle of the risk/reward spectrum and investors should be comfortable with fluctuations in shares on stock markets. The risk of short-term monetary loss is medium, due to moderate exposure to volatility in the stock markets as the portfolio invests a larger portion in local and foreign equities. The portfolio is exposed to equity risk as well as default and interest rate risks. Property shares may be included in the portfolio which can carry the same risk as investing directly in real estate and is subject to economic and political conditions, interest rates and tax considerations. Offshore securities expose the portfolio to currency risk and currency movements may adversely affect the value of your investment.

    The fund is suitable for investors who:

    • Want long-term wealth creation;
    • Are comfortable with some stock market fluctuations;
    • Have a long-term investment horizon of at least five years.
  7. With cold and rainy Cape Town winters, some of my favourites include cosy fireplaces and warm home-cooked delivered meals by our innovative local restaurants. We are also moving to my favourite part of the aisle now; the bold asset classes. Local and global equities. Local is lekker – so let’s start here:
  8. Selecting a single vineyard cabernet franc, youthful, dark red with perfumed blackcurrants, violets, truffles and graphite on the nose.

    PSG Wealth Creator Fof

    The PSG Wealth Creator Fund of Funds’ investment objective is to achieve capital growth over the long term. Income is not the main objective. Investments will, apart from cash in liquid form, mainly consist of investments in equity markets (no more than 95%) via participatory interests in collective investment schemes. The asset allocation will be actively managed to reflect the investment manager’s view of the relative attractiveness of cash, fixed interest, equity portfolios and property markets.

    • Who should consider investing?

    Specific fund risks: The fund sits at the top end of the risk/reward spectrum and investors should be comfortable with fluctuations in shares on stock markets and be prepared to accept the risk of capital loss. The portfolio is primarily invested in local and foreign equities. Equity valuations can be very volatile, especially over the short term. Property shares may be included in the portfolio which can carry the same risk as investing directly in real estate and is subject to economic and political conditions, interest rates and tax considerations. Offshore securities expose the portfolio to currency risk and currency movements may adversely affect the value of your investment. Investments may be concentrated in specific countries, geographical regions and/or industry sectors and may mean that the resulting value may decrease whilst portfolios more broadly invested might grow.

    The fund is suitable for investors who:

    • Are seeking long-term wealth creation;
    • Want exposure to equity markets and are comfortable with stock market fluctuations;
    • Have a long-term investment horizon of at least five years.

    Last but not least … as we are approaching our weekend lockdown, we need to finish up here.

  9. Including a bold, Bordeaux style blend to our collection … Perhaps one from France or Italy? Time to go offshore …
  10. PSG Wealth Global funds

    The PSG Wealth Global Creator Feeder Fund’s investment objective, via its holding in the underlying fund, is to maximise capital returns. It is a rand-denominated feeder fund that invests solely into the PSG Wealth Global Creator Fund of Funds (the underlying fund). The underlying fund consists of participatory interests in collective investment schemes outside South Africa with emphasis on equity-based collective investment schemes.

    The underlying portfolio may hold financial instruments for the exclusive purpose of hedging exchange rate risk and may invest in collective investment schemes that use derivative instruments for efficient portfolio management.

    • Who should consider investing?

    Specific fund risks: The fund sits at the top end of the risk/reward spectrum and investors should be comfortable with fluctuations in shares on stock markets. The risk of short-term monetary loss is high due to the volatility of exchange rates and global markets. The portfolio is exposed to equity and as well as interest rate risks. Investments may be concentrated in specific countries, geographical regions and/or industry sectors and may mean that the resulting value may decrease whilst portfolios more broadly invested might grow.

    Investing in foreign securities may be subject to risks pertaining to overseas jurisdictions and markets, including (but not limited to) local liquidity, macroeconomic, political, tax, settlement risks and currency fluctuations. Changes in the relative values of different currencies may adversely affect the value of your investment.

    The fund is suitable for investors who:

    • Are seeking long-term wealth creation;
    • Want exposure to global markets;
    • Have a long-term investment horizon of at least five years.

    A few tasting notes to take home today:

    • Don’t put off structuring your portfolio. If we have learned anything in the past four months, life is unpredictable. Crises happen faster than we think, and the way you imagined your life playing out might change. Retrenchment, earlier retirement and ill health are all realities we need to plan for.
    • Define your personal goals, and plan for them.
    • Ensure you have a well-diversified portfolio in place which is in line with your risk profile and investment term. To enjoy some of the rewards in the market, we do need a little more time on hand.
    • Remember to look at the bigger picture, and stick to you long term goals – even when speedbumps arise.

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