Page 109 - Profile's Unit Trusts & Collective Investments - September 2025

Investment risk Chapter 6

The particular characteristics of the various asset
classes available to investors makes them suitable at What is side-pocketing?
certain times or under certain circumstances but not Side-pocketing is the process of
others. Interest-based products (especially in a stable separating part of a fund’s assets
currency) may be a safe haven sometimes, but over from the main portfolio. This most
the long term interest rates often fail to keep up with often happens when an asset can no longer be traded
inflation. The danger of eroding value in real terms over (which also hinders updating the fund’s daily market
time is a major risk of “cash” (we mean bank deposits, value). Side-pocketed assets are held pro-rata on
savings accounts and the like rather than money under behalf of unitholders until the investment becomes
the mattress) as an asset class, but there may be times tradeable or is written off. Side-pocketing protects
(when equity markets are weak, for example) when cash investors who remain in the fund (from progressively
might be the better performing asset class. greater exposure to the dormant asset in the event
Rising interest rates can generate improved income of a sell-off), and allows new investors to enter the
yields from bonds but investors risk capital erosion. On the fund without taking on exposure to a dormant and
other hand, falling interest rates can create opportunities potentially worthless asset.
for capital gains in the bond market. Similarly, there are
times when property demand generates capital gains
and improved rental yields; there are other times when
property assets lose value and battle to cover their costs. Liquidity
In short, the weighting of asset classes in a portfolio of This word has two related but distinct
investments has a huge impact on the risk profile of the meanings in the investment world.
portfolio. Collectibles and exotics like fine art, Persian „ A liquid asset is one that can be bought easily
carpets and vintage cars tend to increase riskiness. and sold easily – converted into cash at a fair
Alternative investments like gold and crypto might market price (ie, without the buy or sell order
have a place as a hedge against worst-case disaster materially changing the market price of the
scenarios like war or economic collapse, but under asset). A liquid asset usually has high trading
normal circumstances they tend to be highly volatile and volumes. An illiquid asset, by contrast, trades
speculative assets. Derivatives – unless used specifically infrequently, so that a large order may not only
to hedge long positions – also tend to increase portfolio be difficult to fill, but might drive the price up
risk profiles. or down.
In addition to asset class variation, there are large „ Liquidity also refers to the amount of cash in
discrepancies across equity market sectors. Different an investment portfolio. A South African equity
sectors of the market perform well or poorly under fund which has 10% or 15% of total assets in
different circumstances and at different times. During the cash would be described as having “high levels
spectacular information technology bull run of the late of liquidity”.
1990s, for example, it seemed that it was not possible to
buy an infotech stock that did not rise in price – often for no fundamentally good reason. For nearly
three years after the bubble burst in early 2000, however, it was almost impossible to find an infotech
share 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
needs to concentrate his or her investments in 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.

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