Page 106 - Profile's Unit Trusts & Collective Investments - March 2026

Chapter 6 Investment risk

clearance. Offshore investment allows South Africans to diversify their investment portfolios, which
is especially important as people get older. They should, however, take care to ensure that their
offshore investments are indeed contributing to a diversification strategy – South African investors
may need to avoid investing in other emerging markets or in funds dominated by commodity-based
companies (ie, in markets which share these strong characteristics of the JSE).

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

104 Profile’s Unit Trusts & Collective Investments March 2026