The right investment blend

Trusteeboard Investments right investment blend

The right investment blend

Ian Groenewald, TBI.

No one takes losses lightly; even an investor who has signed off on an aggressive investment mandate. In fact, no matter how small the specific investment item is in relation to a total portfolio, any significant decrease in value is met with horror. At the same time, excellent returns are never greeted with as much enthusiasm as one would expect. It seems that to many investors, all losses are too big, while all gains are too small.

In addition, many investors are their own worst enemies. They sell an investment when it has fallen simply because they can’t take the pain of losing and then exacerbate their situation by investing that money in cash, which rarely provides a return above inflation.

Ultimately, what most investors really want is more of the upside and less of the downside, with a smoother path along the way. An investment in a private equity vehicle that focuses on small and medium sized companies, listed and unlisted, blended with an index tracker fund can do just that.

The financial services industry continually provides new products to meet investors’ needs, using new techniques and variants (such as derivatives) as these evolve. Index funds, which use a passive investment strategy tracking listed equity or similar portfolio’s, are a relatively new development on the investment landscape. Though wildly popular in the US and Europe, they have yet to significantly threaten the hold of active managers, and the advisers who support them, in the South African market.

When strategically blended with the right type of private equity portfolio, however, index funds can add some important benefits into the mix.


As private equity is designed to be a long-term investment, liquidity can be an issue for some investors. While dividends may be paid out along the way, the majority of the return is realised when the holding in an investee company is sold, which can be anywhere from 7 to 10 years down the line. Furthermore, there may not be any published, let alone market-related prices readily available during the course of the investment term.

An index tracker, on the other hand, has almost the opposite features. The price of units is fully market-related, almost any number of units can be readily sold, and payment is almost immediate.

Smoother returns

Assets that are actively traded on the open market can be very volatile, as their prices are subject to numerous influences that may be irrational. Events that shock the market make listed assets wobble or fall; this happens much more often than people realise. The price of private equity shares on the other hand is far less affected by such shocks and tends to move more in line with the fundamentals of the companies invested in. So, while the index-tracker portion of the blend may be volatile, the private equity portion will act as a steadying hand on the portfolio.


There is no doubt that a South African index-tracker fund is unduly weighted to large companies that are dependent on a weak rand in terms of pricing and earnings. However, when coupled with a private equity portfolio that invests in local companies that earn their revenue locally, and where the private equity manager can contribute to the management and future direction of those companies, a healthy dose of diversification is introduced.

On the other side of the coin, diversification is further enhanced when the private equity portion focuses on small to medium sized companies, while the index-tracker will hold shares in big players in the index such as Naspers, Richemont and Sasol.


For the past decade investors have become increasingly aware of and concerned about the cost of investing and how it impacts returns. The fees charged by index funds are naturally much less than those charged by many active managers, and there are no performance fees. Private equity fees are more expensive due to the active involvement of the investment manager in the underlying companies. Again, this blend provides the opportunity for one part of the portfolio to ameliorate a potentially detrimental aspect of the other.

Bespoke vs. off the shelf

Since investors have different goals and risk profiles, a blend of private equity and index funds can be tailor-made to meet different needs simply by changing the mix from, for example, 80% private equity and 20% index-trackers, to 60% private equity and 40% index-trackers. Indeed, a third investment option could even be introduced to the blend. It is the characteristics of the expected return and the potential volatility (loss) of the total portfolio that needs to be assessed when determining the allocation of the investor’s money to each asset, and in combination.