According to the investment guru Sir John Templeton, the aim of almost every investor is to obtain a combination of safety, income and capital growth. This means that for every investor there should always be a sound balance between safety of capital and the required investment return.
The target return investment strategy, positions your portfolio for a specific required return above inflation. It is impossible to achieve this target return without some exposure to risk and the maximum drawdown, can reasonably be expected for a portfolio with such a target return. This specified target return strategy can be implemented very easily by using a fund of funds approach.
The benefits of the target return investment strategy are:
- It simplifies your investment plan, because the funds are managed in line with specific outcomes;
- This makes it easier to construct a specific portfolio to achieve a target return within a specific risk framework;
- The ongoing management of this portfolio is also simplified, because of continuous fund research and asset class changes which are implemented in the portfolio in accordance with the target return and risk framework;
- The funds of funds are approved by the Financial Services Board of South Africa and subject to strict legislation, which protects investors;
- The investments are managed in one fund that invest in other funds managed by top fund managers that are also approved by the FSB, which offers security, enhances the consistency of performance and reduces risk at the same time;
- The investor is not only invested in one fund, but in a combination of funds, which optimizes the consistency of return in relation to the specific risks taken;
- In view of the multitude of unit trust funds available, the fund of fund strategy simplifies the ongoing selection, implementation and management of the optimal combinations of funds to achieve a specific outcome;
- All the aforementioned strategies to enhance consistency of investment performance and reduce risk at the same time are an integral part of the target return fund of funds solution;
- Changes or switches made in the fund of funds are not subject to capital gains tax.
Diversification
Diversification is a very effective way of managing risk and enhancing the consistency of performance. Research shows that there are three significant ways to diversify risk effectively, namely:
Time diversification
By allocating different sums of money in specific portfolios for specific needs over specific time horizons, it is possible to increase consistency of investment performance in the portfolio and to reduce risk. Allocating money to short term, medium term and long term objectives offers the investor an opportunity to construct a specific portfolio for a specific objective over a specific time horizon. This clarifies objectives and enables us to manage specific portfolios in line with realistic objectives, which empowers investors to have realistic expectations. Realistic objectives and realistic expectations increase the probability of achieving their time-based objectives and it avoids emotional investment decisions at the same time.
Time, asset class volatility and asset class performance go hand in hand. Historically, asset classes have performed differently over specific periods and, as a result, the time-horizon of an investment is a good indicator of what type of returns can be expected from different asset classes and what asset classes will be more appropriate to invest in.
Fund diversification
Research confirms that no one fund manager has ever succeeded to manage a top performing fund all the time. Even the best fund managers have their bad years. As a result, we believe that, in order to achieve consistent investment returns, it is better to allocate investments to different funds, managed by different fund managers. Investment managers who have the same objective, but use different styles and methods to get there should give us the desired outcome, but at a much lower risk.
Asset class diversification
Cash, property, bonds and equity are the most commonly known asset classes. Each of these asset classes has had their good years and bad years over different periods. By investing into a combination of these different asset classes, investors can increase the consistency of investment performance, enhance the probability of achieving the desired outcome and reduce the chance of capital loss at the same time.