Page 137 - Profile's Unit Trusts & Collective Investments - September 2025

Understanding asset allocation Chapter 7

Hedge funds are sometimes considered part of
alternative investments, sometimes as a distinct Arbitrage
investment category. Arbitrage is the activity of profiting
Rand-denominated funds in SA registered under from differences in price when
CISCA are not permitted to invest in alternative assets the same security, currency, or
like fine art, gold bullion, Persian carpets or livestock. commodity is traded on two or more markets.
Overseas, however, there are dozens of funds that offer Where discrepancies between different markets
alternative assets to investors. A number of ETFs allow appear, the arbitrageur will step in to exploit the
investors to add baskets of cannabis stocks to their situation. The arbitrage dealer’s selling price is
portfolios. There’s an ETF that provides long exposure to higher than the buying price. By taking advantage
the dry bulk shipping market through a portfolio of near- of momentary disparities in prices between markets,
dated freight futures contracts on dry bulk indices. arbitrageurs perform the economic function of
Many alternative investment funds are unregulated making those markets trade more efficiently.
and unlisted (ie, investors deal directly with the fund
manager). Such private funds are often illiquid and have high fee structures. Investors attracted to
funds offering exotics need to be aware that price discovery is often opaque and asset valuations
educated guesses at best – particularly in the case of collectibles, where prices achieved at auction
can fluctuate wildly. Even exotics that are accessed via registered ETFs or mutual funds overseas
are typically more volatile than traditional asset classes.

Balancing the asset mix
Increasingly, unit trusts are used not so much as discrete investment destinations but as the
building blocks of broader investment strategies. In the current investment environment, relatively
few investors own a single unit trust – more typically, a balanced portfolio is constructed using
several unit trusts that, together, match the investment profile and financial objectives of an investor.
In this environment it is not enough to know the different asset classes and their characteristics,
one must also understand how they work together. This is particularly relevant when it comes
to retirement funding products and annuities, where the regulatory framework and ethical
considerations both demand that investors receive appropriate advice and suitable products.
In short, an “either/or” view of asset classes is seldom applicable. While there are no doubt still
astute investors who shift investments between asset classes according to market conditions
(eg, retreat into cash when equity markets are volatile or declining), the majority rely on long-term
asset allocation for protection. In practice, only a small minority of investors actively switch between
asset classes in response to market cycles; most assume that the investment choices made by fund
managers and advisers will see them through.
This reality makes it imperative for financial advisers to grasp the complex relationships between
asset classes on the one hand, and the risk capacity, risk appetite and investment goals of individual
investors on the other. The solutions are seldom simple. Interest bearing products provide
safety but typically do not produce enough growth in the long term to adequately provide for
retirement needs.
Conversely, the volatility of equities means that too much exposure at the wrong time can seriously
erode retirement capital. To further complicate matters, costs and prudential regulations must be
taken into consideration, especially where retirement products are involved.

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