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An alternative way of diversifying a portfolio

Investors have been moving towards cash, says Roenica Tyson – investment product manager, Glacier by Sanlam.

WARREN THOMPSON:  Good day. I’m Warren Thompson from Moneyweb, and joining me on the podcast today is Roenica Tyson, who is investment product manager at Glacier by Sanlam. Today we are discussing an alternative way of diversifying a portfolio. Good to have you with us, Roenica.

ROENICA TYSON:  Excellent, thank you Warren.

WARREN THOMPSON:  We live in a world full of volatility and uncertainty, certainly both domestically in South Africa as well as when we look abroad and see what’s happening in the rest of the world. You’ve supported some ideas for diversifying an investor’s portfolio in different ways. Just tell us what the basis for this article was about.

ROENICA TYSON:  Sure, Warren. I think what we’ve seen over the last few months is that, given all the uncertainty that you’ve mentioned, investors have become too nervous to be in the market and to stay invested for them to start thinking about alternative ways to support investor behaviour.

So unfortunately the one thing we have seen from investors, given the uncertainty, is that they start focusing on the short term and start making emotional decisions. So that sort of long-term investment strategy they devised with their financial intermediary, they are starting to ignore [it] at this point, given the environment we are operating in.

WARREN THOMPSON:  This is typically done when emotions come into play, and emotions are just as evident in the way we manage our money as when we do anything. Just explain what is happening when we start to see things that make us uncertain or nervous about the future.

ROENICA TYSON:  Sure, Warren. It’s often not justified the way investors behave in times like this, but it’s natural, given our human nature and our hard-earned money and our savings. The biggest trend that we are going to see for investors looking for that certainly is a big move of money into cash. The banks’ fixed deposits are very high on their radar at this stage, and I think that’s understandable. If we look at the investors who have been in the market over the last two or three years, those who were invested in the local equity markets moving into balanced multi-asset type mandates, they haven’t had a great experience and cash was actually the asset class that outperformed them.

So most recently I’ve experienced their feeling of not being rewarded for the risks they have taken has made them look towards cash investments. There are obviously also risks along with cash investing, but I should highlight certain of those things. One thing is with a cash investment investors often underestimate the impact that tax and inflation will have on those investments, how those things just eat away at investment returns.

Second, for investors who are sort of hiding in cash and looking for that certainty, for them to try going back into the market and getting that exposure to growth assets again is a tricky decision. It’s impossible to time the market and the impact of missing out on the first few weeks or period of the market recovering can have a significant impact on long-term returns. That’s another dilemma that investors face when making that alternative decision.

WARREN THOMPSON:  Besides just avoiding trying to time the market and just staying invested for the long haul, you’ve suggested a few other ideas that investors can use to diversify their portfolios, specifically using something called structured products. Now, what are those?

ROENICA TYSON:  Exactly, Warren. I think the benefit of these products that we are able to design is that it almost gives investors the best of both worlds. So with this we recognise the need for investors to be in those growth asset classes and to have exposure to equities and properties for long-term growth. But we also understand, given the behaviour, that client certainty that comes with that is hard. So with these products we are able to give investors that upside, but without the typical uncertainty and volatility that comes with that. So we are able to design a product that can actually guarantee an investor’s capital and so have the protection and the certainty that that is actually covered – yet also participate in the performance of equity markets.

WARREN THOMPSON:  So what you are saying is that these products protect your actual capital, so the amount you put in should not be at risk. But they usually lock you in for a couple of years. What sort of upside or positive returns can you enjoy by being invested in these?

ROENICA TYSON:  Warren, the most recent one we’ve made available at Glacier is the Glacier Capital Enhancer. So using that as an example, this is an investment with a five-year investment horizon. Investors aren’t able to access their capital during that period. But, considering the return they stand to earn for making this commitment, I think it is very attractive.

What we’ve able to manage to secure for our investors is an exposure to a basket of global stocks, of blue-chip stocks listed in Europe and in the UK, so getting that diversification of a local portfolio. And then for any positive return that portfolio will have over the next five years, investors can stand to earn an enhanced return of 11% after tax per annum.

If we express that in inflation terms, we are looking at an inflation-plus-five type of return over the next five years. And that’s for any positive move in the market.

So currently where the outlook for economic growth is looking quite low, for this environment it’s also quite ideal to have an enhanced return potential, but then also not have any cap on further upside. So any performance above that level investors will also fully share in, without any limits. So definitely getting the best of that growth while, as you mentioned, having their gross investment amount guaranteed, and knowing that if those markets were to correct, they will still get their capital back.

WARREN THOMPSON:  What tax implications are involved in these products?

ROENICA TYSON:  Warren, what we managed to do with this, given that is a five-year investment, is to make it available in a sinking fund policy. So the tax on that is quite beneficial as all the returns are earned as capital gains. That’s the sort of return that attracts the lowest type of tax payable. And then also with it being in the policy that it’s a sort of low life-company tax rate, only 12% capital gains tax is payable on this current product. So that’s where the 11% per annum after tax before positive performance comes in.

WARREN THOMPSON:  Who does this product typically apply to?

ROENICA TYSON:  Warren, that’s quite an interesting question because, if we look at it from a risk perspective, the typical risks are volatility and potential of capital loss; those are out of the picture. From a risk perspective investors are comfortable to go into cash-type investments, so you have that counterparty exposure to a bank. That’s important. But then from the return side investors are looking to enter high-growth equity-type returns. I think if you almost look at it as of a typical efficient fund here you have low risk and low returns and high risk and high returns, but this capital amount almost sits off that curve. High returns can be earned while having a low-risk exposure.

WARREN THOMPSON:  Great. We’ll have to leave it there. That’s was Roenica Tyson, investment product manager at Glacier by Sanlam.


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