By using different types of assets - equities, local and foreign; bonds; listed property; or other asset classes - the diversification of a portfolio can help protect value.
The balanced portfolio approach is becoming increasingly popular in South Africa, with large flows of new money into balanced or multi-asset unit trusts. But how good are these unit trusts compared with using exchange-traded funds (ETFs) to do your own multi-asset portfolios?
The table below shows a portfolio construction of well-known ETFs in each asset class with the average annual returns for this portfolio measured over periods of three years and five years. This balanced investment return is compared with the average returns of the multi-asset unit trusts, using different classes of funds over the same period.
As can be seen, there is a significant performance premium to be gained from using low-cost ETFs to construct multi-asset portfolios. The ETF portfolio is also not constrained by the layers of costs occurred in multi-asset unit trusts, plus the scalability and other market related issues that affect the unit trust industry.
* Mike Brown is the MD of etfSA.
etfSA : Mike Brown
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etfSA.co.za is owned and managed by M F Brown, a registered Financial Services Provider (FSP License No 39217) and its managing director is Mike Brown who was one of the top economists in South Africa. Mike Brown also worked as Chief Economist of the Chamber of Mines in the 1970s and early 1980s. Mike spent some 20 years in stock broking as Head of Research and Director of some of South Africa’s largest stockbrokers. In the late 1990s, he helped establish Satrix, the first ETF Manager in South Africa and managed Satrix full time from 2003 to 2009, before leaving to establish etfSA. He is also a registered (non-practising) stockbroker and has over 35 years experience in South African financial markets and is one of the acknowledged experts on ETFs in South Africa.