Fundamental Investments

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Welcome to Fundamental Investment




Basics of Investing…..
Before you begin to invest you should spend a few minutes reading and understanding the Basics Of Investing.

Investement Types

Cash investments

These are short-term debt instruments, or IOUs, that you can convert to cash, with little or no penalty. Examples of these cash investments are:
Money Market Unit Trusts
Certificates of Deposits (CDs)
Bills and BA (Bankers acceptances)

These investments are viewed as safe investments but over time their returns have slightly exceeded the rate of inflation.


Bonds are loans that investors make to corporations and governments. The lenders earn interest and borrowers get the cash they need.

Public sector fixed-interest securities are known as "gilt-edged" securities (or "gilts") when they refer to government stocks, and "semi gilts" when they refer to the stock of the lower ranking public bodies such as municipalities or public enterprises. The rate at which interest is paid and the amount of each payment is fixed at the time the bond is offered for sale.

A bonds coupon rate (interest rate) is competitive which means the rate it pays is comparable to what other bonds being issued at the same time are paying.

The coupon rate is one of the parameters used to determine the consideration (price) paid for the bond. Interest rates have a direct impact on the price paid for bonds. The value of a bond often increases as interest rates drop and decreases in value when they increase.


A company share is normally defined as any number of equal indivisible rights or interests in the management, profit and ultimate assets of a company constituting the property of those who own it and being evidenced by a certificate.

Shares are sometimes referred to as equities - hence the equity market as opposed to the fixed-interest market.

If the Company prospers, you as the investor will share in its profits and benefit from any rise in the market value of its stock. Conversely, if the company runs into problems the value of your stock will drop.

Shares are considered more risky than bonds or cash.

If you are investing for the long term, you ought to invest in shares as shares have historically outperformed other investments.


Risk and Reward

"What is the chance I'll lose my money?" The key element in any investment strategy is the tradeoff between risk and return.

We must decide for ourselves how we want to balance goal risk and investment risk. o

To decide how much risk to take in your investment you must be familiar with the following types of risks…

  • Principal risk - this refers to the possibility of losing your initial investment (i.e. the money you invested). Usually, investments with a higher degree of principal risk have a potential to yield greater returns over time than investments with a lower principal risk.
  • Inflation risk - The possibility that increases in the cost of living will reduce or eliminate an investment real return.
  • Fluctuation risk - is related to principal risk, but refers to how much the price of an investment may move up or down.
  • Country risk - The possibility that political events such as war, financial problems or natural disasters will weaken the country's economy and cause the investments to decline.
  • Currency risk - The investment may be priced in a currency which may devalue or appreciate this is also called exchange-risk.
  • Industry risk - The possibility that a group of shares in a single industry (e.g. mining) will decline in price.
  • Interest rate risk - The possibility that bonds will decline in value because of an increase in interest rates, the opposite would be beneficial to the investor.
  • Manager risk - The possibility that the investment company or investment manager does not execute the fund’s investment strategy and as a result the investment suffers a loss.

One way to keep the various types of risk in balance, and achieve your return goals, is to spread your assets among various investment classes. This strategy is called asset allocation and investments should be spread among various investment classes to reduce the risk.

How to reduce risk

  • Start young - If you start to save from a young age you will have more time for your money to grow and it will be more affordable.
  • Invest for the long term - If you invest in shares your investment risk decreases over time. The long-term returns will more than compensate you for the risk taken.
  • Diversify - Asset allocation is one of the most important factors to reduce risk.
  • Returns - Don't expect excessive returns from the stock market try to outperform inflation by two or three percent.


Value versus Growth

The financial services industry, and the unit trust industry in particular have always been awash with theories about how best to maximise your returns while minimizing your risk. As managers and advisors strive to create ever more complex models on which to base their decisions, it is often the basics that get overlooked.

We know well, that past performance is not an accurate guide to future performance and yet we continue to rely on this measure as an indicator of what we are likely to get back from our investments in the future, but what about style? A manager's investment style can, over the long term, make a real difference to the returns achieved on an investment but until recently this important aspect has been much overlooked.

What is style?

Most asset managers tend to favour a path somewhere between the two, but it is the degree to which managers follow these opposing styles which will, it has been shown, determine the success of their investments over time.

In simple terms a 'growth manager' will look at a range of company shares and attempt to predict which of those shares is likely to rise in the future. The growth manager will then buy the shares of those companies he thinks most likely to rise, regardless of the underlying valuation of the company in the hope that they will indeed increase in price. A value manager on the other hand will look at a range of stocks and attempt to determine which shares are 'cheap' relative to the underlying value of the company. The Value style of management relies on the belief that markets are not perfect and stocks are often miss-priced. The skill lies in identifying those stocks that are cheap because their true value has yet to be identified, as opposed to those that are cheap for good reason.

Value or Growth

Many independent studies have been conducted to identify which style will deliver the best returns over time. Without exception, all have identified Value as the clear winner over every significant time period. If this were true however why is it that the majority of fund managers declare themselves to be Growth managers?

The explanation is simple yet revealing. By nature growth managers tend to be competing with each other to buy the same stocks. Value managers on the other hand, tend to be more contrarian, looking for stocks which have not yet been identified by others and then holding them until their price rises to 'fair value' at which point the share is sold. (Just at the point at which a growth manager would buy in the hope of further rises). Adopting this style requires conviction on the part of the fund manager that his research is accurate and his decisions valid, without the support of market consensus to reassure.


Asset Allocation

Asset allocation is the process by which investors decide what proportion of their portfolio should be invested in different types of investments.

The theory behind this, is that by diversifying among different asset classes, an investment portfolio can be constructed that has less risk than the weighted average of its component parts. In other words, different asset classes move up and down at different times.

Once you have an idea of your risk profile, you can choose the type of portfolio to aim for. It is important that this decision is reviewed on an annual basis as your needs and profile can change.

One of the most popular formulas designed to provide a stage of life allocation - the age method - is to subtract your age from 100 to determine your share percentage, put 10% in cash and the remainder in bonds.

The next method that can be used is the resource / goal method. Here you would need to determine your time horizon. The longer the time period the greater the share allocation. Money that is needed in the short term should not be invested into shares.

Next you would choose the asset class and your risk profile would help you choose the assets for the portfolio.

Lastly you would need to determine how much of the portfolio to invest in each asset class so that the targeted return can be achieved.

It is important to examine the "downside risk" or the amount you might lose in a year for your specific portfolio. In other words, find out how bad the worst years have been.

In South Africa a minimum of 25% of your retirement portfolio must be invested into cash, bonds or a combination of the two.


Sample portfolio (1)

Accumulation period (ages 18 - 50)

Sue Fuller, a 30 year-old IT manager has decided to start planning for her retirement. She is willing to accept a higher level of risk in order to reach for long term retirement goals.


Sue has just joined PC Technologies Pension Fund. The normal retirement age for the pension fund is 65, however Sue has decided she would like to make additional provision so she can retire at 50. Sue has taken the following factors into consideration when choosing asset allocation for her top up contributions into a provident fund.

  • The pension asset allocation is done by the trustees of the fund and her pension is a defined benefit pension scheme.
  • Sue will change employers a few times in her career but she will preserve her pension.
  • Sue wants to have children and will have to take a year’s leave.
  • Sue is aware of the high divorce rate and wants to provide for herself and not rely on her husband.
  • Shares have given better returns than other primary asset classes.
  • Sue must outperform inflation.
  • Sue can take more risk with this investment, as her pension fund asset allocation is fairly conservative.
  • Sue needs 80% of her final salary at retirement, and realises that her pension fund will not be adequately funded and hence the additional contributions being paid into her top up provident fund.

Sue is aware that her aggressive asset allocation could face losses in some years.
Sue has decided to invest 75% of her money into shares. She has to invest 25% into cash and bonds as her investment must comply with legislation (Prudential investment guidelines) 80% share 20% cash / bonds / property.


Sue has decided to review her asset allocation each year.


Sample portfolio (2)

Accumulation period (ages 50 -60)

John Dunlop, has just turned 55, he is an executive director at a large manufacturing company.

John has been able to accumulate a number of assets during his working career. The bulk of his assets are in the company pension fund. John intends to retire at 62 and would not like to drop his standard of living during his retirement. John estimates that he would need approximately 85% of last annual salary to be able to retire comfortably.

Fortunately John has a top-up provident fund, company shares and a private share portfolio.

• John wants to retire in 7 years, and does not want to take any risks with his pension and provident funds.
• A lengthy market decline could have a disastrous effect on his pension.
• John is now prepared to get a lower return to lock in the past performance of his pension and provident fund.
The portfolio that has been recommended to John until he retires: shares 65%, bonds 35%.


John has decided to adopt the recommendation and review the asset allocation every 6 months.


Sample portfolio (3)

(age 60)

Peter Andrew retired last week; he is 62 and has a wife. He has no bond and has replaced his car, which he hopes will last him for the next 15 years. Peter's main worries are inflation and health costs.

• As they are both healthy now, Peter and his wife feel they could live until 85 or longer and they do not want their pension to be eroded by inflation and then rely on their children for financial support.
• Peter is worried that his base currency will devalue.
• Peter's wife feels the cost of medical aid is increasing and the benefits are being limited.
Peter was advised to make the following investment: Shares 55% and bonds / cash / property 45%

As Peter had to protect himself from inflation he elected to take a reasonable income and let the capital appreciate to make provisions for both himself and his wife. Peter was also advised to take a guarantee at 70, where both the capital and income are both guaranteed.


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