Finding the (relatively) cheaper asset classes

Chris Froome entered this year’s Tour de France as the ultimate favourite, after winning last year’s Tour de France, followed by winning the Vuelta a Espana, and (earlier this year) also the Giro d’Italia. 

But his strength relative to that of Geraint Thomas (winner of Tour de France 2018), was simply unmatched. 

Perhaps Froome was, relatively speaking, just too tired or too weak, or perhaps Thomas was just relatively stronger. 

Whichever way you look at it, his relative weakness compared to Thomas cost him first place. 

The concept of relativity can be a very versatile and useful tool in the investment world.

It can be used to tell us more about where we find ourselves market-wise and, although it mostly relies on historical data, it can also tell us how expensive (or cheap) a particular share, currency, commodity, bond or sector is, relative to another.

Studies have shown that more than 90% of long-term investment results are achieved through proper asset allocation, while only 10% could be attributed to good market timing in different markets and sectors. 

In a balanced portfolio, investments can be divided into five main groups: money market instruments, domestic bonds, property shares, domestic shares and offshore investments. 

For the sake of convenience, offshore investments in my analysis consist of a 60% share in the Global Equity Index and a 40% share in the Global Government Bond Index. 

Diversification remains investors’ best defence against risk, which is why it is so important not to focus on only one of these five groups.

All five of the above mentioned asset classes have historical returns. 

It is by comparing these returns that we can get an indication of how cheap or expensive they are relative to each other. 


By using shares as an example, we will see that historically, the average earnings yield over the past 15 years traded at 100% (1 times) compared to the average earnings on the remaining four asset classes (money market instruments, property shares, domestic bonds and offshore investments).

Graph 1: FTSE/JSE All Share Index earnings yield relative to other asset classes (source: PSG Old Oak & Iress)

At its current 77% ratio, it shows us that the returns on shares aren’t cheap relative to the other four asset classes. 

This definitely doesn’t mean that it no longer offers any value and that we should exclude it from our personal portfolios, but rather that we should keep our exposure to shares steady at an underweight position. 

This repositioning applies especially to those with a lower risk profile.

Graph 2: SA Money Market rates relative to other asset classes (source: PSG Old Oak & Iress)

The money market has moved very close to an overweight position these past few months and, along with local bonds, seems to be priced reasonably. Offshore investments, especially in developing countries, definitely proved fruitful over these past few years.

I have to warn readers to be extremely careful when it comes to offshore investments, simply because the model doesn’t focus too much on foreign exchange rates.

Most investors’ portfolios would have developed an overweight position in offshore investments over the last five years due to the weakening of the rand.

The relativity indicator, however, is showing us that this asset class now offers relatively “less” value, which means that you may have to cut back to remain within your risk profile. 


Graph 3: Offshore investments relative to other asset classes (source: PSG Old Oak & Iress)

It’s quite interesting to note that the only domestic investment class that currently offers true value relative to the other asset classes, is also the one that suffered quite a severe beating this year: the SA property sector. On average, this sector’s earnings yield also traded at 100% (1 times) the average of the other four asset classes’ earnings. 

At 1.3 times, this asset class deserves an overweight position in your personal portfolio (as long as it remains within the scope of your personal risk profile), according to the relativity indicator.

Graph 4: SA Property Share Index relative to other asset classes (source: PSG Old Oak & Iress)

In conclusion, yes, the current investment environment remains a challenging one at best, but it is possible to manage your own portfolio, as long as you pay attention to properly diversifying your portfolio, and secondly, by paying attention to limiting assets in your portfolio that offer less value relative to others. 

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