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Investment Strategy
Sunday, April 1, 2007
History lesson

How much would your capital be worth today had you invested the then equivalent of R50 into SA equities and R50 into global equities at the end of December 1925? The quick answer is that SA equities would have returned R3,45m, and global equities R2,35m for a total R5,70m. This example takes no re-balancing into account. And the question is, would the outcome be better with a different strategy?

For example, had we re-balanced the combined sum after each month to maintain a 50-50 weighting, our initial R100 would now be worth R9,56m compared to the R6,70m (100% exposure to SA equities) or R4,70m (100% exposure to global equities). Quite clearly, a strategy of rebalancing over this period would have afforded the investor with the benefit of absolute out-performance.
From a ‘risk’ perspective there would also have been an added benefit. If one had a 100% exposure to either SA equities or global equities, one would have experienced in the worst case scenario a 12 month loss of between -47% and -47.7%.
On the other hand, had we experienced a consistently balanced 50-50 split between the two asset classes over this period, the downside risk would have been limited to -37.8%. At the same time, the best 12-month period would only have returned 81.8%, but over the entire period the returns would have been better. The annual ‘risk’ would also have been reduced significantly from between 20.4% (all global equities) and 17.8% (all local equities) to 14.5% for a 50-50 split.
In conclusion, this exercise has demonstrated that by regularly rebalancing an investor’s portfolio from time to time so that it is aligned with a long-term strategic asset allocation, one can improve both the absolute returns for the client over time, as well as reduce the potential of capital loss at any given point.
By Mark Seymour of Alphen Asset Management

PS. We know there were no ‘Rands’ in 1925! And had there been R100 in 1925, it would have been the equivalent of R10 712 today.

Copyright © Insurance Times and Investments® Vol:20.3 1st April, 2007
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