Patrick Cairns  |  28 July 2016 00:21

CAPE TOWN – In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who wants to know whether his advisor should have held back on making any investment decisions until the ratings agencies make a decision on South Africa.

Q: I just a made an investment of R400 000 via a financial planner who placed these funds within a unit trust portfolio.

My question is twofold:

Firstly, if we are downgraded to “junk” status, is there any possibility of me losing my investment or the investment not yielding the promised dividends?

And, secondly, should I have waited or should the financial planner have advised me to hold on with the investment, pending the outcome of the ratings decision later this year?

The first likely result of a downgrade would be further depreciation of the rand. This would be brought on by foreign investors selling their local assets and taking their money out of South Africa.

To understand how this would affect your personal portfolio, you need to look at the breakdown of the underlying assets and how the portfolio is split between local and foreign assets. A weaker rand means that the foreign holdings would look better, as they would be worth more in local currency terms. In addition, since many of our locally-listed shares are also rand hedges (around 70% of the market cap of the JSE), it’s likely that a large portion of your local holdings would also be protected.

On the other hand, some local assets would suffer as a result of rand weakness. However, since a downgrade would be a well anticipated event, it is most likely that the fund managers with whom your advisor has placed you have adjusted their portfolios accordingly.

Secondly, it is important is that you understand the difference between the long-term and short-term impacts a downgrade might have. Depending on your particular plans and requirements for this investment, your advisor should have selected funds that suit you for the time period you are looking to invest.

Assuming that you are investing for the long term, the bigger threat to your investment is not the immediate effect that a downgrade would have, but more what it means for the long-term economic prospects of our country. A downgrade to junk status would be a confirmation of what we have been hearing for a long time – that our growth and inflation prospects are poor, and that despite the threat of a downgrade with plenty warning, we have been unable to prevent this from happening.

This is a difficult environment for any company to operate in, and the expectation would be that it will result in lower earnings and therefore lower dividends in future for those who operate only locally. This would negatively affect share prices. Once again, you can avoid having too much exposure to local assets by having a large foreign or rand hedge component in your portfolio, but that also opens you up to the risks of other countries and currencies.

What your advisor and fund managers will most likely have done is to take account of the impending downgrade and act appropriately. Junk status or not, your investment should be well diversified so that when certain assets weaken, others will strengthen.

Keep in mind that our own ratings downgrade is not the only risk to your investment and probably not the biggest risk either. Consider how our own markets seem to follow international events more closely than local ones.

This brings me to the second part of your question regarding whether or not you should have waited. The answer is no. It is never a wise decision to delay investing to try to time the market.

The reason for this is that the market reacts to unexpected events, which by their nature cannot be anticipated and therefore you cannot time your investment accordingly. This event is expected, and so fund managers have had the opportunity to rebalance their portfolios to try and minimise the risk of this particular possibility.

If there is a short-term dip in our markets because of a downgrade, then they will surely take advantage of that too, by buying quality assets at lower prices.

Studies have shown that the biggest threat to your wealth is often your own investing behaviour. If you hesitate too long, or if you act on emotion and withdraw at the wrong time, your investments will suffer.

Timing the market is a gamble and one which investors most often lose.

Mikayla Collins is a private wealth manager with NFB Private Wealth Management in Cape Town.

Source : Personal Finance