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Investment Concepts 
 
Types of investment (Asset Classes)

There are different types of investments available to retirement funds.

The ones most often used are:

• Shares - A little piece of a company
• Bonds - Similar to an IOU; issued by the government or a corporation
• Property - Such as investments in business parks or shopping centres
• Cash - Such as money in a bank
Shares
When you buy shares in a company, you are in effect buying a small part of the company and will share in any profits declared in the form of dividends. Equity prices are sometimes affected by market sentiment. Sometimes investors are negative towards the market (or towards a sector of the market or a particular company listed on the market) and even if the company in which the Fund has invested is doing well, the shares may still fall in value.

The reasons for rises and falls in equity prices are sometimes predictable. However, often the market may rise or fall because of factors that are not predictable. For this reason it is very difficult to time entry into and exit from the market to take advantage of these movements. Trying to time the market to increase your investment returns is a bit like taking your life savings to a casino.

Equities can be bought and sold on "stock exchanges" throughout the world. The South African stock exchange is called the JSE Ltd (Johannesburg Stock Exchange). The two main features of equities (compared to property, bonds and cash) are:
  • Historically, over the long term, equities have been the asset class that provided the highest investment return; and
  • Equities have had the highest volatility (or risk).
This makes sense - higher returns are usually associated with taking on more risk.
Bonds
Bonds are instruments with a promise to repay the capital amount plus interest at a specified date in the future. It is therefore an IOU issued by the government and semi-government institutions. They are also bought and sold in the secondary market and can therefore also have negative returns. Bonds have a lower risk profile than shares, but the expected long-term returns are also lower.
Property
Property investments are investments e.g. in large corporate estates where the Fund earns a rental income. Property investments are not very liquid (it is difficult to sell them at short notice) and are therefore not utilised for retirement funds on a regular basis.
Cash
Such an investment is like your bank savings account or a 30-day fixed deposit. Because such investments have a very short term (i.e. less than 12 months), they are much less affected by changes in interest rates than bonds, and are the least volatile of the asset classes described above. Cash and “near cash” are expected to provide the lowest return of all the asset classes over the long term. 
International investments
 
Investments in equities, property, bonds and cash can be done either in South Africa or internationally. The main additional factors introduced by international investment are:
  • The retirement Fund can be exposed to the companies that have the best growth prospects in the world. For example, there are very few South African companies in the rapidly growing pharmaceutical and health care sector - internationally the Fund can get exposure to the best companies in this sector.
  • The Fund is exposed to currency changes. Say, $1 currently costs R13 and the Fund invests R13 million in the USA (i.e. $1 million). If the Rand now "weakens" so that $1 now costs R15, the Fund will profit since its $1 million investment is now worth R15 million.
  • From time to time there are episodes of investor panic and heightened "risk aversion". Increasingly, these episodes occur globally, rather than just being confined to one country. When this happens, there is often a tendency for international investors to sell assets in markets such as South Africa that are perceived (whether fairly or not) as "risky". Commonly in such episodes there is a so-called "flight to quality", in which investors retreat to the perceived safety of bonds issued by the governments of the major industrial nations such as the USA, Japan, and Western Europe. Having some investments in these major markets, especially in their government bonds, may give the Fund a degree of short-term protection in such episodes of investor panic.
What is an investment portfolio?
 
 
 A portfolio is a combination of different investment types. The more shares in the portfolio, the higher the investment risk of the portfolio.

Investment Terms
 
  • The gross investment return over a measurement period is the growth in the market value of the asset for a specific period divided by the market value of the same asset at the beginning of the period. Any new money invested or disinvested has to be taken into account. More correctly this is known as the nominal investment return. 
  • The net investment return is the gross investment return less the manager fees. This is the return that is credited to your Retirement Savings Account.
  • The market value is the price at which there is a willing seller and a willing buyer. 
  • The measurement period is the period (say, one year or 3 years) over which one measures the investment return. 
  • The inflation rate over a measurement period is how much more it will cost you to buy a "basket" of goods at the end of the period compared to what it cost at the beginning of the measurement period. 
  • The real investment return is the nominal investment return less the inflation rate over the same measurement period. It is an important measure since it calculates how much better your investments have done than inflation. 
  • The volatility is a measure of how much the investment return can vary (fluctuate) over the measurement period. It is a measurement of the risk you take. Please note that the market value of most investments can go up or down. 
  • Asset allocation refers to the percentage of the Fund's assets invested in equities (shares), property, bonds and cash.
    Ideally you should focus on the net real investment return, as this is the measure that will determine how much your retirement benefit will be worth.