Managing an investment portfolio is a constant balancing act


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SIMON BROWN:  I’m chatting now with Roné Swanepoel, business development manager at Morningstar Investment Management. Roné, I appreciate the early morning. Our investors can diversify and keep the balance. Diversification and even asset allocation, to a degree, are designed in a sense to protect us and to mean that we are not overly exposed – to for example, equities last year – so that we’ve got some bonds and cash to help buffer the pain.

But it is also I think that balancing act perhaps that a lot of us get wrong.

RONÉ SWANEPOEL: Absolutely. Simon, thank you so much for having me. If we think about our personal lives and think about balance, balance is such an important thing if you think personally, but it’s just as important when it comes to investments. So managing an investment portfolio is exactly like you say, a constant balancing act, whether it be the allocation between cash and equities, local and global markets, if you think about value and growth or even between active and passive fund managers. If 2020 taught us anything, it’s that the future is very, very uncertain. So it’s a reminder really of the importance of diversification.

SIMON BROWN: Yes. Today is  actually three years since the World Health Organisation declared Covid a pandemic, and it’s been the wildest three years ever. I suppose when we are standing back in the clear light of day we can think around those decisions – around active and passive, around cash and equity and the like. But then when markets get wild, it’s [about] staying the course, and that re-balancing is always a struggle for me.

For example, last year equities were under pressure, cash and bonds winning. Should we be looking to aggressively re-balance in the short term, or should we rather let larger trends play out?

RONÉ SWANEPOEL: When you think about asset classes, no asset class has a perfect strike rate and performs well all the time. So it’s everything we think about that classic Smarties box graph that we always look at, and asset classes move around every single year. So there’s no asset class with a perfect strike rate.

It’s exactly the same when you think about fund managers within an investment portfolio. No fund manager has a perfect strike rate. I think back to a conversation I had earlier in my career, when I [was discussing] diversification and client portfolios with the managing director of a large fund manager at the time, and he said, Roné, be very nervous when you don’t have an underperformer in your portfolio because that might mean everyone is doing the same thing. So you don’t only want to be diversified by asset classes, but also fund managers. And then re-balancing is so important.

So what’s actually done well – you want to buy less of that and buy more of what’s not done well. Over the short term there are definitely large movements in markets. Do you want to keep on re-balancing that portfolio to make sure you are well diversified, but also let the long-term trends play out?

SIMON BROWN: I love that point. If everything’s going up, they’re quite possibly all doing the same. And I think there is perhaps a nuance that we often don’t consider when we think about that diversification, where if you’ve got three funds, you don’t want three high-growth funds because they’re probably all in the same stock. You want perhaps an income, a high growth, and then a good old-fashioned value to kind of offset each other.

RONÉ SWANEPOEL: Absolutely. I think a client portfolio can actually [give] good diversification and smart diversification. Like you mentioned, everything doesn’t move in the same manner within a portfolio.

But it can actually be quite uncomfortable if you think about it. It can create this what we call ‘line-item risk’, because you look at your statement and you see this underperformer and you think why is everything going up, and you’ve just had this underperformer; it gets quite uncomfortable. But actually, there’s always going to be [one]. If you have a portfolio of equities that’s rising in growth, your diversifying asset might be providing you zero or negative real return in some circumstances.

SIMON BROWN: And that’s then truly [about] understanding the fund that you’re buying, understanding the management mandate, the philosophy and the like – or having a financial advisor who’s able to walk you through that so that you can understand why some might be lagging at some point or others perhaps booming.

RONÉ SWANEPOEL: Exactly. I always think about how it works when you said intelligent or smart diversification means not just investing in a bunch of different things, because sometimes you think diversification means variety, so we just have to invest in every possible thing, in every possible style, in every possible asset class. But you want to invest in things that respond differently to the same factors within a portfolio.

SIMON BROWN: That’s a great point. It’s that different response. I like that. That’s an excellent point. We’ll leave it there. Roné Swanepoel, business development manager at Morningstar Investment Management SA, I appreciate every early morning.

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