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Investment Management

Investment management involves the specialised ability of a portfolio manager to handle managers and their teams of analysts will study qualitative and quantitative factors to identify opportunities to generate excess return and actively trade (buy and sell) to achieve this goal.


The portfolio management process is more complex than it might sound. A portfolio manager must take the investment time horizon, risk tolerance and diversification into account when constructing and overseeing the investment portfolio. When it comes to building portfolios, portfolio managers use their expertise and experience to blend different investment philosophies, strategies, processes and analytics to create elite solutions.

Achieving Excess Return

Creating these efficient portfolios, requires a hands-on approach by the experts and can be referred to as “active investing”. Portfolio managers and their teams of analysts will study qualitative and quantitative factors to identify opportunities to generate excess return and actively trade (buy and sell) to achieve this goal.

 

The portfolio management process is more complex than it might sound. A portfolio manager must take the investment time horizon, risk tolerance and diversification into account when constructing and overseeing the investment portfolio. When it comes to building portfolios, portfolio managers use their expertise and experience to blend different investment philosophies, strategies, processes and analytics to create elite solutions.

As diversifying a portfolio is one of the key drivers behind generating performance, proper asset allocation is of the essence. Spreading the holdings across different jurisdictions, industries, companies or sectors (sometimes even different asset classes), reduces the risk and ensures that “not all is lost” when for instance a specific sector may plummet. True diversification is however not about spreading the portfolio as thinly as possible, but ensuring that the underlying assets behave differently to one another in response to market events or news. This is measured by correlation.

Watch our video on Asset Classes here.

 
Correlation

Correlation examines underlying portfolio holding relationships and helps portfolio managers to predict how one asset will behave, based on the movement of another asset. If two securities move in the same direction, they have a positive correlation. When they move in opposite directions, they display negative correlation. Ideally, a portfolio should hold some securities that behave differently to one another as it manages the risk within a portfolio. A well correlated portfolio is key to successful investing and generating a good return, without taking any unnecessary risk. Watch our video on Correlation here.

 
Top-down, Bottom-up

Portfolio managers have different approaches to ensure a diversified selection of investments in the portfolio.

 

The top-down method studies the wider economic and macroeconomic factors first, such as the total production, income and expenditure in the economy, level of employment, interest rates, taxation and so forth. If a country’s economic outlook is positive, investors would be more enthusiastic to invest in that country and does not pay too much attention to the underlying companies that they are investing in.

 

The bottom-up method works the other way around and starts by evaluating the potential of a specific company and not the wider economic factors. The company’s products and services, management team and financial structures play fundamental roles in determining if the company would generate the expected returns.

 
Strategic and tactical tilting

One of the strategies that portfolio managers use is a dynamic approach to asset allocation, using both strategic and tactical methods.

 

Strategic asset allocation is a portfolio manager’s fixed, long-term view on the mix of assets to achieve the objective of generating the highest possible return for the level of risk taken.

 

Tactical asset allocation allows for adjustments to the asset mix to capitalize on opportunities that present themselves in the market and subsequently enhance returns.

 

Blending these two methods means that the portfolio manager will have a set, strategic view for the long run, but may deviate from the fixed asset allocation for a short period, taking advantage of certain market movements. This dynamic approach integrates the best of both worlds: enhancing returns, whilst simultaneously mitigating risk over time.

 
Volatility

Volatility measures how much an asset’s return will deviate from its average performance or benchmark. In essence, it examines the frequency and extent at which an asset’s price will rise or fall. Volatile assets, like equities, are considered to be riskier, because their performance tends to be unpredictable as there can be sudden or large changes in their prices. When the price of an asset changes at a slower rate over a longer period, it is considered to be less volatile. Volatility creates opportunities for portfolio managers to take advantage of the markets and to generate a profit.

At Fairtree, our approach to investment management is unique, as we manage a diversity of long-only and alternative investment portfolios across all global asset classes. Adhering to Fairtree’s sound investment philosophy, our acclaimed specialist teams blend different investment philosophies, strategies, processes and analytics to create elite solutions.

 

A Top-down and Bottom-up view

We follow a meticulous top-down and bottom-up analysis to ensure a diversified selection of investments in each fund.

 

The top-down method studies the wider economic and macroeconomic factors first, such as the total production, income and expenditure in the economy, level of employment, interest rates, taxation and so forth. If a country’s economic outlook is positive, investors would be more enthusiastic to invest in that country and does not pay too much attention to the underlying companies that they are investing in.

 

The bottom-up method works the other way around and starts by evaluating the potential of a specific company and not the wider economic factors. The company’s products and services, management team and financial structures play fundamental roles in determining if the company would generate the expected returns.

 
Quant driven funds

A number of funds include complex quantitative algorithms, time-tested to derive market value through unique strategies to generate wealth for our clients. This is combined with a hybrid model of human expertise and experience in decoding the quantitative models, adds another layer in deciding final portfolio inclusions.

 

First in South Africa to include alternative assets in blended portfolios

Standard portfolios in the financial industry largely consist of a blend of conventional assets, such as equities, property, fixed income, as well as cash and cash equivalents. Alternative assets are however a range of unconventional / “non-traditional” financial securities to invest in, which include Hedge Funds, Private Equity and Commodities.

 

Fairtree is the first in South Africa to follow an exceptional and influential approach to portfolio construction: blending traditional asset classes with alternative strategies and assets. Our portfolios include directional equity, quantitative and directional equity, directional fixed income and credit, equity diversifiers and soft commodity diversifiers.

 

As asset allocation primarily drives performance, these combinations in portfolios provide outstanding diversification opportunities and has proven to generate superior excess return for investors.

 
Strategic and tactical tilting

By blending strategic and tactical tilting, our portfolio managers remain true to their strategic view for the long-term, whilst taking advantage of certain market movements in the short-term.

 

Our tailored investment portfolios have a “core”, which is invested in a diverse range of multiple asset classes, including local and offshore investments in equity, property and fixed income. Around the “core” we invest in “satellite” funds, which usually specialise in specific asset classes, enabling us to up-weigh or down-weigh across asset classes. This provides us with the opportunity to tilt the portfolio in accordance with different economic conditions, whilst staying true to our strategic view inside the core.

 

*The core itself does also contain a degree of tactical tilting.

 

This approach integrates the best of both worlds: enhancing returns and creating long-term wealth, whilst simultaneously mitigating risk.

As diversifying a portfolio is one of the key drivers behind generating performance, proper asset allocation is of the essence. Spreading the holdings across different jurisdictions, industries, companies or sectors (sometimes even different asset classes), reduces the risk and ensures that “not all is lost” when for instance a specific sector may plummet. True diversification is however not about spreading the portfolio as thinly as possible, but ensuring that the underlying assets behave differently to one another in response to market events or news. This is measured by correlation.

Watch our video on Asset Classes here.

 
Correlation

Correlation examines underlying portfolio holding relationships and helps portfolio managers to predict how one asset will behave, based on the movement of another asset. If two securities move in the same direction, they have a positive correlation. When they move in opposite directions, they display negative correlation. Ideally, a portfolio should hold some securities that behave differently to one another as it manages the risk within a portfolio. A well correlated portfolio is key to successful investing and generating a good return, without taking any unnecessary risk. Watch our video on Correlation here.

 
Top-down, Bottom-up

Portfolio managers have different approaches to ensure a diversified selection of investments in the portfolio.

 

The top-down method studies the wider economic and macroeconomic factors first, such as the total production, income and expenditure in the economy, level of employment, interest rates, taxation and so forth. If a country’s economic outlook is positive, investors would be more enthusiastic to invest in that country and does not pay too much attention to the underlying companies that they are investing in.

 

The bottom-up method works the other way around and starts by evaluating the potential of a specific company and not the wider economic factors. The company’s products and services, management team and financial structures play fundamental roles in determining if the company would generate the expected returns.

 
Strategic and tactical tilting

One of the strategies that portfolio managers use is a dynamic approach to asset allocation, using both strategic and tactical methods.

 

Strategic asset allocation is a portfolio manager’s fixed, long-term view on the mix of assets to achieve the objective of generating the highest possible return for the level of risk taken.

 

Tactical asset allocation allows for adjustments to the asset mix to capitalize on opportunities that present themselves in the market and subsequently enhance returns.

 

Blending these two methods means that the portfolio manager will have a set, strategic view for the long run, but may deviate from the fixed asset allocation for a short period, taking advantage of certain market movements. This dynamic approach integrates the best of both worlds: enhancing returns, whilst simultaneously mitigating risk over time.

 
Volatility

Volatility measures how much an asset’s return will deviate from its average performance or benchmark. In essence, it examines the frequency and extent at which an asset’s price will rise or fall. Volatile assets, like equities, are considered to be riskier, because their performance tends to be unpredictable as there can be sudden or large changes in their prices. When the price of an asset changes at a slower rate over a longer period, it is considered to be less volatile. Volatility creates opportunities for portfolio managers to take advantage of the markets and to generate a profit.

At Fairtree, our approach to investment management is unique, as we manage a diversity of long-only and alternative investment portfolios across all global asset classes. Adhering to Fairtree’s sound investment philosophy, our acclaimed specialist teams blend different investment philosophies, strategies, processes and analytics to create elite solutions.

 

A Top-down and Bottom-up view

We follow a meticulous top-down and bottom-up analysis to ensure a diversified selection of investments in each fund.

 

The top-down method studies the wider economic and macroeconomic factors first, such as the total production, income and expenditure in the economy, level of employment, interest rates, taxation and so forth. If a country’s economic outlook is positive, investors would be more enthusiastic to invest in that country and does not pay too much attention to the underlying companies that they are investing in.

 

The bottom-up method works the other way around and starts by evaluating the potential of a specific company and not the wider economic factors. The company’s products and services, management team and financial structures play fundamental roles in determining if the company would generate the expected returns.

 
Quant driven funds

A number of funds include complex quantitative algorithms, time-tested to derive market value through unique strategies to generate wealth for our clients. This is combined with a hybrid model of human expertise and experience in decoding the quantitative models, adds another layer in deciding final portfolio inclusions.

 

First in South Africa to include alternative assets in blended portfolios

Standard portfolios in the financial industry largely consist of a blend of conventional assets, such as equities, property, fixed income, as well as cash and cash equivalents. Alternative assets are however a range of unconventional / “non-traditional” financial securities to invest in, which include Hedge Funds, Private Equity and Commodities.

 

Fairtree is the first in South Africa to follow an exceptional and influential approach to portfolio construction: blending traditional asset classes with alternative strategies and assets. Our portfolios include directional equity, quantitative and directional equity, directional fixed income and credit, equity diversifiers and soft commodity diversifiers.

 

As asset allocation primarily drives performance, these combinations in portfolios provide outstanding diversification opportunities and has proven to generate superior excess return for investors.

 
Strategic and tactical tilting

By blending strategic and tactical tilting, our portfolio managers remain true to their strategic view for the long-term, whilst taking advantage of certain market movements in the short-term.

 

Our tailored investment portfolios have a “core”, which is invested in a diverse range of multiple asset classes, including local and offshore investments in equity, property and fixed income. Around the “core” we invest in “satellite” funds, which usually specialise in specific asset classes, enabling us to up-weigh or down-weigh across asset classes. This provides us with the opportunity to tilt the portfolio in accordance with different economic conditions, whilst staying true to our strategic view inside the core.

 

*The core itself does also contain a degree of tactical tilting.

 

This approach integrates the best of both worlds: enhancing returns and creating long-term wealth, whilst simultaneously mitigating risk.

Frequently Asked Questions

The FAQs marked with a (*) includes engaging material to help you navigate this phase and make wise financial decisions that your future self will thank you for

The principle of “risk-return trade-off” means that potential return rises with an increase in risk. Differently put, if you take more risk, you can expect a higher return. For instance, if you invest in equities, you face the risk of losing some of your capital, however the probability of receiving a high return is good. Keeping your money in cash will likely preserve your capital, but you will earn a low return on you investment.

Active managers are usually in pursuit of outperforming the market over the long-term, taking advantage of short-term market inefficiencies. Exploiting market fluctuations requires a high level of expertise and portfolio managers are supported by their team of analysts, who study qualitative and quantitative factors. Consequently, investors benefit from this ‘hand-on approach’, as these experts have the ability to capitalize on opportunities, avoid specific risks and adjust the clients’ portfolios in order to meet their specific needs. Although active investing is more costly than most passive strategies, research has shown that there are portfolio managers who can add substantial value to your investment portfolio, relative to what passive strategies have achieved.

Correlation examines the relationship between various assets and how they move in relation to one another. In other words, we can predict the movement of one asset by looking at the movement of another asset. There are different correlations: the assets can move together exactly, move similarly but not exactly the same, the movement of the one is not influenced by another asset, they move totally opposite and lastly, opposite movement but not exactly opposite. A well correlated portfolio is key to successful investing and generating a good return, without taking any unnecessary risk.

Watch our video on Correlation here.

Different factors contribute to a fund or portfolio’s performance, such as asset allocation, security selection, asset class timing, different styles within asset classes and fees. Portfolio managers take all of the beforementioned into account when building a portfolio to ensure that they achieve the specified objective and generate the highest possible return for the level of risk taken. Once you have chosen a suitable fund / portfolio for your investment goal, you need to trust the expertise of the managers and remain invested for the duration of the required investment period. Trying to time the market yourself, by switching in and out of investments to profit from market surges, may in reality cause you to miss out on market growth.

In general, hedge funds have been said to have more risk associated with it compared to other investment strategies. It is however important to note that by including hedge funds in your portfolio, you can actually reduce your overall risk levels. Hedge funds provide exceptional diversification within a portfolio as they can contain alternative assets like soft commodities, directional equity and directional fixed income and credit that will behave differently in similar market conditions, compared to conventional asset classes. Other important factors which have influence on the level of risk within the hedge fund is what asset classes the hedge fund is trading in as well as the nature of the derivative structure/gearing employed within it.

Many investors try to time the market by moving their money in and out of certain investments, usually basing their decisions on the latest trends or changes in the economy. Truth be told, by the time most investors hear about the “next big opportunity” or the “hot off the press” topic, the window of opportunity has already begun to close or the rest of the market has already reacted to the news. It is wise to stay committed to your investment strategy, even if it means losing out on some opportunities along the way. You will gain more by staying invested throughout the duration of your investment goal(s), than incurring unnecessary costs and suffering disappointments for choosing the “wrong share at the wrong time” and trying to recover by making impulsive moves.

Many investors believe that spreading their investment money across different funds or asset managers is diversification. Diversification is much more complicated and includes specific risk-return characteristics, asset class exposure, relationships between funds and correlation. Combining and being exposed to different assets classes will insulate your investment portfolio against the ups and downs as no asset, industry or sector performs the same at any given period in time. Furthermore, holding assets that behave differently from one another is key and this is known as correlation.

Watch our short course Session 3 for more on how to achieve diversification inside of your portfolios.

Choosing a suitable investment solution involves much more than only looking at the performance. Here are a couple of key aspects to consider in order to help you interpret a fund fact sheet, minimum disclosure document or portfolio sheet:

 
Time horizon

If your goal is to save for buying a new car in 18 months from now, it would be unwise to invest in a fund / portfolio with a time horizon of 5 years or longer. Such a fund / portfolio would experience volatility over the short-term and may not meet your expectations after 18 months.

 
Risk Profile

A risk profile goes hand-in-hand with the time horizon and asset allocation. It works like a sliding scale and will range from low to high or conservative to aggressive. A “high” or “aggressive” risk indicator is associated with a fund or portfolio aimed to provide growth over the long-term and will include a substantial exposure to asset classes like equities and property.

 
Description / Policy / Objective

This section explains what assets the fund / portfolio may invest in, what it aims to achieve, for which type of investor it would be best suited and any related information. This short extract (for example) would immediately indicate that this fund is for short-term investing: “The fund is a largely domestic, high yield, fixed income portfolio, which aims to return STeFI +3% after fees through the interest rate cycle”.

 
Asset Allocation

A fund / portfolio will consist of a blend of different assets/asset classes, in certain ratios and is inherently linked to the time horizon and risk profile. A high exposure to equities will be associated with a longer investment time horizon and a more aggressive risk profile.

 
Performance

It is important to remember that past performance is not indicative of future results and you may be very disappointed if the fund / portfolio doesn’t meet your expectations. Furthermore, be mindful of the benchmarks being used when the performance of one fund / portfolio is being compared to another as you need to compare “apples with apples”. Lastly, be realistic in terms of the expected return and your goal – you cannot expect to double your money in a year or two.

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Setting Your Investment Goal

There are various goals that an investor may be desiring to achieve. The important thing to note about goal setting is the element of time . Goals can range from short, medium and/or long term. Whether your reason for investment be for capital growth, for capital preservation, to save toward retirement, for income withdrawals, saving to buy a house, saving to go on a holiday or even investing towards your children’s education, no matter the reason, choosing the correct investment vehicle and fund is key. Fairtree Invest, specializes in multi-managed solutions that are strategically designed to meet their client’s bespoke investment goals. Would you like to start your journey?