Page 105 - Profile's Unit Trusts & Collective Investments - March 2026

Investment risk Chapter 6

Crown and Star ratings
Various companies use risk rating systems designed to make it easier for investors to assess
the quality of funds on a risk-adjusted basis. The methodology used to produce Crown or
Star ratings typically combines measures of performance (alpha), volatility and consistency
to calculate a risk-adjusted return. Funds are ranked based on their scores, usually by sector but
sometimes by style, so that the best funds get the most crowns or stars. Usually funds are only ranked
if they have at least a three-year history. In addition to these quantitative ranking systems, some
companies also produce qualitative ratings based on evaluations by independent analysts.
In SA the main systems available to investors are Morningstar’s Star ratings and the PlexCrown ratings.
Both use a 5 point system. These systems also rank management companies based on the aggregate
ratings of funds in each manager’s stable. The specifics of the methodologies used are available on the
companies’ respective websites.
From an investor’s point of view, Crown and Star ratings are a quick way of identifying funds with
consistent track records and good risk-adjusted performance. However, studies have shown that they
do not reliably predict future performance. A 4 or 5 point rating, therefore, should not be treated as a
“buy signal” but rather as one possible method of narrowing down the fund universe.

Covid-related market crash of March 2020 and failed to get back in lost out on a massive bull run.
Measured from the mid-February 2020 high point before the crash, the Nasdaq index gained more
than 40% to mid-February 2021.
Currency risk
This is the risk that otherwise good investment returns will be eroded by a weak currency. There
have been several periods in the JSE’s history where a rising local market has been accompanied
by a weakening rand. If the local equity market rises 25% over a particular period, for example, and
the rand depreciates against the dollar by 25% over the same period, then measured in dollar terms
JSE returns would be zero (ignoring dividends).
The opposite, of course, can also happen – that a currency strengthens while the market weakens.
If the JSE declined by 10% over a particular period and the rand improved by 10% against the
dollar over the same period, the net gain for a dollar-based investor would be zero (again, ignoring
dividends).
The currency effect is particularly important for overseas investors buying South African shares.
A significant portion of the JSE’s turnover is in shares which have traditionally been South African but
which now have their primary listings in other countries. For investors in those countries (including
asset managers), currency risk is often as important a factor as market risk.
Currency risk is obviously reduced by diversification – through offshore investment or through
funds that hold overseas assets. South Africans can also protect against currency risk (the risk
of the rand depreciating) by investing in certain JSE shares. Export-sensitive companies and
rand-hedge stocks perform well if the rand is depreciating, because these companies sell their
products for a higher rand price offshore. An appreciating rand, on the other hand, favours companies
that are reliant on imports and has a negative impact on rand-hedge stocks.
Geographic risk
Even if international exchange rates were fixed, there would still be the issue of different markets
in different countries performing differently.
It is a peculiar phenomenon that major world equity markets often move in tandem – on average,
the London stock market is more likely to be rising when the American market is rising than vice
versa. But there are also periods when world markets are not in sync. German equity markets might
be falling while those in America are rising, or those in Japan might be moving sideways while those
in Europe are performing strongly.
South Africans over the age of 18 are allowed to invest up to R2m per calendar year offshore
(as part of a general discretionary foreign exchange allowance), and up to R10m subject to tax

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