Page 108 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 6

Rising interest rates can generate improved
What is Side-Pocketing? income yields from bonds but investors risk capital
Side-pocketing is the process of erosion. On the other hand, falling interest rates can
separating part of a fund’s assets from create opportunities for capital gains in the bond
the main portfolio. This most often market. Similarly, there are times when property
happens when an asset can no longer be traded demand generates capital gains and improved rental
(which also hinders updating the fund’s daily yields; there are other times when property assets
market value). Side-pocketed assets are held lose value and battle to cover their costs.
pro-rata on behalf of unit-holders until the
investment becomes tradeable or is written off. In short, the weighting of asset classes in a
Side-pocketing protects investors who remain in portfolio of investments has a huge impact on the
the fund (from progressively greater exposure to risk profile of the portfolio. Collectibles and exotics
the dormant asset in the event of a sell-off), and like fine art, Persian carpets and vintage cars tend
allows new investors to enter the fund without to increase riskiness. Alternative investments like
taking on exposure to a dormant and potentially gold and crypto might have a place as a hedge
worthless asset. against worst-case disaster scenarios like war or
economic collapse, but under normal
circumstances they tend to be highly volatile and
speculative assets. Derivatives – unless used
Liquidity
specifically to hedge long positions – also tend to
This word has two related but distinct increase portfolio risk profiles.
meanings in the investment world.
In addition to asset class variation, there are
(1) A liquid asset is one that can be
bought easily and sold easily – converted into cash large discrepancies across equity market sectors.
Different sectors of the market perform well or
at a fair market price (ie, without the buy or sell
order materially changing the market price of the poorly under different circumstances and at
asset). A liquid asset usually has high trading different times. During the spectacular information
volumes. An “illiquid” asset, by contrast, trades technology bull run of the late 1990s, for example,
infrequently, so that a large order may not only be it seemed that it was not possible to buy an
difficult to fill, but might drive the price up or down. infotech stock that did not rise in price – often for
(2) Liquidity also refers to the amount of cash in an no fundamentally good reason. For nearly three
investment portfolio. A South African equity fund years after the bubble burst in early 2000, however,
which has 10% or 15% of total assets in cash would it was almost impossible to find an infotech share
be described as having “high levels of liquidity”. that did not decline steadily.
On several occasions over the decades, gold
mining companies have enjoyed the double benefit of a weakening rand and rising gold price –
under such circumstances, gold mines can make huge profits. At other times the same gold mines
have suffered the difficult operating conditions of a strengthening rand and falling gold price, a
scenario which can put marginal mines out of business.
Certain economic conditions favour banking shares and fixed-interest products. There have been
periods when bond funds have topped the ranking tables quarter after quarter as a result of falling
interest rates. In times of rapid and steadily rising interest rates, however, the prices of bond funds
will fall in spite of the best efforts of portfolio managers.
These are just some examples of the tremendous variation which occurs in the performance of
different sectors under different market conditions.
To maximise returns over the short-term, the portfolio manager of a multi asset fund obviously
needsto concentrate hisor her investmentsin the best performing sectors. But doing this means he
or she runs the risk of being in the wrong sectors at the wrong time. For this reason, having all of the
assets of a portfolio in any one sector (as happens with a theme fund) is considered high-risk.
Nevertheless, more aggressive funds may choosetoexploit thesemarkettrendsbyswitching
their investments into sectors that they feel are due for a re-rating. “Playing” the market in this way
demands a much more active approach to investment management – and while it increases potential
returns, also increases risk.

106 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts