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    Seed Weekly - Goal Based Investing

    A well-designed and thought-out investment strategy is crucial to anyone planning to build wealth.

    Designing such a strategy is no small task. Each individual has unique circumstances, preferences and needs. The future remains opaque and forces one to make certain assumptions that may or may not turn out to be correct.

    Another stumbling block in the process of designing an investment strategy, is defining risk for an individual or entity. This is, in fact, harder than one may think. Is it loss of capital (permanent or temporary), minimizing volatility, avoiding large drawdowns, missing growth targets, inadequate liquidity? Is it perhaps all of the above? Or a combination of the above? This question becomes even more convoluted if you realize that one's ability and willingness to tolerate risk is often not the same, or even constant, over time.

    This makes one wonder if there is any use in undertaking this laborious exercise.

    Many say that this is preferable to nothing, which makes sense. Better a rough model that points vaguely in a direction, than stumbling blindly through your investment life-cycle. Of course, we demand more from ourselves as professionals. We don't like uncertainty and believe that vagueness is not an acceptable basis from which to give advice. It is a major task to get this right.

    How does one run a marathon? Step by step.

    Start by defining your investment goals, and then ranking them. Apply an 'if-then' heuristic starting with the most important goals. If the primary goals are attainable, to a high degree of probability, determine whether the next goal is realistic and move down the ranking table.

    If your primary goal is to have sufficient assets for retirement, and you have a number of years to go before drawing on your assets, adopt a long term approach and ensure that you are adequately funding this goal. Don't let a supplementary goal, such as buying a shiny new car, impede you from reaching your primary goal by applying 'short term thinking' to a long term goal.

    Long term goals will have a different definition of risk in comparison to short term goals; not meeting growth targets in the long term should be the primary risk factor. Risks such as minimising volatility, liquidity management and drawdown avoidance should not dominate the primary risk factor. You cannot aim for double digit growth without experiencing some volatility. The shorter term the goal, the more emphasis will be placed on the minimisation of volatility, drawdowns and liquidity management.
    The above leads one to adopt a goals based investing approach. This approach will have an investment strategy and tranches of committed capital for each goal. We do not make use of this methodology primarily, as it goes somewhat against most efficiency models and theories. Building an efficient portfolio has been deeply ingrained in our approach, and still forms a major part of our process.

    Goals based investing helps one to compartmentalise and understand your goals. It is by no means a perfect solution, as it will result in an overall portfolio that is not optimal. It is something we consider a practical measure in simplifying the task of designing your investment strategy, and as such constitutes a part of the process we undertake to properly design your strategy.

    Kind regards,

    Stefan Keeve

    ***SEED IS HIRING: Seed is looking to hire an Administrative Assistant on a contract basis. Please click here to view vacancy

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-02-22, 12:42:44, by Mike Email , Leave a comment

    Seed Weekly - Fund Management Industry Update

    2016 was a challenging year for investors as macroeconomic issues rather than fundamentals, proved to be the key market drivers. Politics in particular, played a key role in markets both locally and globally with key issues around Brexit, the US election and domestic politics.

    The challenges within the economy and markets however did not deter local fund managers from launching new products. According to data from Morningstar Direct, 177 new unit trust funds were launched in 2016, with 22 management companies responsible for the launches. As at 31 January 2017, Assets under Management within these funds totalled R37 billion, 85% of which is attributed to only 6 of the management companies. Approximately 68% of the new funds are co-named portfolios.

    Figure 1: New Funds launched in 2016 per Association for Savings and Investment South Africa (ASISA) category

    Source: Morningstar Direct (3 February 2017)

    The majority of the new funds, both in count and assets are locally focussed as illustrated in Figure 1. The Assets under Management of these South African focused funds total R32 billion and the total number of funds is 130. Unsurprisingly, the bulk of the assets are in the ASISA Multi-Asset categories which have seen good growth in recent years. The South African General Equity category also saw significant changes with 25 funds launched with assets of almost R8 billion by the end of January 2017.

    Although there was a significant number of new funds, only a relatively smaller number of funds were terminated. Analysis of Morningstar data indicates that approximately 24 funds were terminated. These funds held a combined R4.1 billion in assets at the beginning of 2016. A total of 91 fund classes were liquidated over the year. Furthermore, 9 funds were merged with other funds thereby ceasing to exist in their original form. All in all, 33 fund classes were merged and incorporated into other funds.

    The above statistics show that the industry continues to grow and this makes choosing funds for investors even more complicated. It remains important for investors that funds actually deliver performance in line with their investment targets. Absolute performance provides a quick reference point for investors to check if investment objectives are being met. The table below summarises the best and worst performing funds in popular ASISA categories.

    Table 1: Fund Performance (% Return) as at 31 January 2016

    Source: Morningstar Direct (6 February 2017)

    The dispersion in performance between the best and worst performing funds over the last year is quite large. Moreover, some of the winners over the last year were the losers in the last few years with the opposite also true for some of the losers. The dispersion and cycles of performance highlights some of the complexities investors face in choosing appropriate funds to meet their investment objective especially in this growing industry.

    At Seed, our process helps us to navigate the fund choice complexities for our clients. We carry out extensive fund and manager research using a combination of industry and proprietary analytical tools, which we couple with our extensive manager experience. With a long-term philosophy, opportunity seeking and risk management mind-set, we are well equipped to assist our clients in meeting their investment targets over the long run.

    Kind regards,

    Tawanda Mushore

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Please click here to view our disclaimer. For more information please visit our website.

    Permalink2017-02-09, 10:58:26, by Mike Email , Leave a comment