Abstract
Abstract : Investors are faced with a daunting number of decisions and options that can be made and taken on their path to their wealth accumulation over the course of their investing lives. As a result, investors often find the wealth accumulation process to be an overwhelming task. Investors, and their advisors, also do not have the time and means to adequately assess the trade-offs associated with asset allocations decisions and therefore having to trust processes on a tacit basis. Research shows that Equity, as an asset class in isolation, has provided the largest cumulative return for the South African context for the last century. However, empirical research assessing this against the outcomes of multi-asset portfolios is rare for the South African context, with studies also not being specifically considered for a time horizon more appropriate to a period when Property has explicitly been separated in the South African context. The purpose of the study was twofold: firstly, to test whether investors are rewarded by moving from multi-asset high Equity investing into a pure Equity portfolio. Secondly, to contrast how the risk-adjusted reward presented to an investor changes across the risk-spectrum of the efficient frontier as an investor moves from less volatile asset classes to volatile asset classes. The general stylised graphical depiction efficient frontiers, and understanding by retail investors, is that Equity provides investors with the highest rate of return and the largest ending wealth level over time. This stylisation implies that marginal returns for the risk taken by investing into Equity only are still offered at the far end of the efficient frontier where the assets with the largest volatilities reside. The perception that Equities may offer the largest cumulative return over time, relative to other single asset classes, is often confused with Equity investing providing the highest ending wealth levels for retail investors. Investors also have no direct means of considering volatility and risk in the allocations to Equity. This could potentially result in Equities receiving a large percentage, or full, allocation within an investors’ portfolio. Retail investors are not generally equipped with the tools to consider the incremental return versus the incremental risk of decisions, nor are they v equipped with the tools to consider the effects such as volatility drag on assets in their portfolio. In this research, the risk-adjusted return metrics were determined for the FTSE/JSE ALSI, SA Listed Property and BEASSA ALBI Indexes. The performance return series data for each respective index was then used to construct risk-adjusted return metrics for multi-asset portfolios. Three sets of multi-asset investments were created, using the asset class proxy’s historical returns, to represent the general risk profiling outcomes offered to investors, which entailed low-Equity, medium-Equity, and high-Equity investment portfolios. The results were then assessed to gauge whether investors received marginal benefits by increasing their allocation to Equities. The FTSE/JSE ALSI Index was used as the comparison for a pure Equity portfolio. It was found that the risk-adjusted returns of the multi-asset portfolios generated larger risk-adjusted returns than an Equity-only portfolio provided. It was further found that the ending wealth levels for multi-asset portfolios were larger in the majority of instances for an investor over the sample period of the study. The marginal returns relative to risk taken rapidly diminished over the study period for allocations to Equity larger than 50% of total assets. The conclusion was that an investor did not need to accept the additional risk required by investing in an Equity-only portfolio in order to achieve a greater ending wealth level over the sample period studied. An investor can potentially achieve a greater ending wealth level by accepting a smoother return profile as reported by lower return standard deviation, while not forgoing returns contributing towards ending wealth levels over a cumulative 15-year period within the South African investment context.
M.Com. (Investment Management)