Investing across asset classes in a low yield environment

Johannesburg - Smooth returns in a low-yield, high volatility environment is the ‘holy grail’ for investors. This is certainly achievable but not if all eggs are placed in the same type of basket. Diversification across different asset types – including exposure to local and offshore equities, bonds, and commodities – helps investment portfolios deliver solid returns in any environment. Multi-asset class – or balanced funds – are constructed to deliver on the upside, while smoothing out the downside.

Nico Katzke, Head of Portfolio Solutions at Satrix, says the lack of diversification that comes from being invested in just one asset class is very risky. "When it comes to long-term wealth creation, diversification and patience are key. One of the most effective ways is to include a low-cost, multi-asset index product– or balanced index fund - in a portfolio. These funds consist of index-tracking funds that spread risk effectively across different asset classes.”

He said there are numerous advantages for investors. “As well as delivering consistent performance and smoothing returns, index balanced funds avoid the erosive effect of high fees – both management and trading – on returns. Combined, these features perfectly position a balanced index offering as an essential part of any well-diversified, long-term investment strategy."

The Satrix Balanced Index - and Low-Equity Balanced Index Funds have delivered consistent performance over recent years. “The stellar performance of our index balanced funds, particularly over the medium to long-term, stems from the use of well-diversified, low-cost indices. In addition, significant value is added by using an optimised multi-factor solution, SmartCore™, which accounts for good value, momentum, and quality characteristics of local companies. 

To explain the smoothing effect of multi-asset class funds, Katzke says that the average monthly return correlations (calculated annually) between the 40 largest companies on the JSE according to market capitalisation typically range between +0.20 and +0.35 (+1 would see all share prices move in unison). However, during the pandemic-related market turmoil, this level rose to well over +0.60.

On the other hand, he says correlations between asset classes (local equities, local bonds, local cash, global equity, global bonds, and local property, all priced in ZAR) were significantly lower, ranging between -0.1 to +0.1, with the high of just over +0.30 reached in the 2020 crash, which resulted in far fewer fluctuations and more stable performance.

“This means those invested across local and offshore asset classes would have achieve far more consistent performance than those who had invested in, for example, purely local equities.

"The Satrix High-Equity Balanced Index Fund is a good example of an indexed solution to multi-asset fund management. Its asset class building blocks are all well-diversified index funds," explains Katzke. Examples of index funds included are Bloomberg Barclays Aggregate Global Bond Index and the MSCI All Country World Index, consisting of almost 3000 companies globally. 

On the debate about whether multi-asset solutions should use indexation, Katzke says that several academic studies have asked the same questions in the past year. "It is crucial to understand the difference between strategic asset allocation and tactical asset allocation. A fund's strategic asset allocation is a set of long-term weightings to each asset class derived from its investment strategy and objectives. Tactical asset management is when managers deviate from the strategic asset allocation weightings. 

"These tactical decisions can be organic (allowing weights to drive with market movements) or deliberate (such as deciding to move out of property or into bonds, generally termed 'timing')," explains Katzke. However, one of the studies showed that a representative blend of funds making active tactical allocation calls significantly underperforms its strategic allocation focused indexed alternatives. 

"The future is uncertain. That will not change. Changing our investment habits to grow wealth through our diversified and low-cost solutions remains within our reach," concludes Katzke. 

Other external resource (s):

https://junilearning.com/courses/intro-to-personal-finance-for-kids-private