Page 124 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 7 Understanding asset allocation

Chapter 7

Understanding asset NQF

allocation Relevant to
119997: 2, 5
242594: 1
243130: 1, 3
Investments are conventionally divided into five asset classes: cash, 243142: 3, 4
bonds, equities, property and alternative investments. Alternative 243148: 1, 2, 5
investments include a wide range of assets from private equity, private 243153: 3
debt, infrastructure, hedge funds, commodities, cryptocurrencies, foreign 243154: 3, 4
243155: 1
currencies, property (not listed) and collectibles such as art, jewellery and 242560: 1
rare stamps. 242572: 3

The different characteristics of the four main asset classes make them suitable for
different investment objectives, and have a direct impact on the characteristics of the collective
investment schemes which invest in them. In broad overview:
R Equities (shares in companies) are generally considered long term investments with a
relatively high degree of risk, although opportunities for short and medium term investment do
arise in the stock market from time to time
R Listed property is considered a long term investment with less risk than equities because the
distributions are based on more stable rental income
R Bonds (long term debt instruments) are considered medium to long term investments and
also carry a relatively high degree of risk
R Cash (which includes things like money market investments and fixed deposits) is considered
a short term investment with a low risk level
Cash
The most liquid, risk-free investment offered by the collective investment scheme (CIS) industry is
the Money Market fund. The yield on these investments may outperform other types of investments
for short periods, but is unlikely to do so over the long term. Astute investors take refuge in Money
Market funds when the equity markets are very volatile, or when they need a “parking place” for
surplus funds while deciding where to invest for the longer term.
One of the problems with cash-based investments is that they often offer a very low or negative
“real” rate of return (ie, the yield less the rate of inflation). There have been a number of periods in
SA’s history where the after-tax return on fixed deposits and similar investments has been less than
inflation. In this situation, although the account balance might be increasing, the investor is actually
steadily losing money in real terms.
Figure 7.1 shows the insidious effect of inflation over time. At an inflation rate of 5% per annum,
R1 000 is worth only R614 after 10 years. Looked at from an investment point of view, it means an
investor faced with 5% inflation would need to achieve a return on investments of at least 5% after
tax in order just to preserve the value of his capital.
Money Market funds
Money Market funds are named after the wholesale markets where banks lend and borrow large
sums of money. Money markets allow holders of surplus cash to get a short term return and helps
others cover short term liquidity shortfalls. The money market therefore helps to optimise the
allocation of cash resources in the economy by providing trade finance, covering the short term
working capital requirements of large businesses, and meeting other short term cash requirements
in the economy. There is no physical money market; it is a virtual market which operates through an
informal network of linked terminals all over the world.

122 Profile’s Unit Trusts & Collective Investments September 2025