Understand the big picture

WITHOUT a thorough understanding of the way investment managers control equity exposure via pension and provident funds, retirement annuities and endowments, personal investors cannot hope to make the right decisions to balance their equity investments.

WITHOUT a thorough understanding of the way investment managers control equity exposure via pension and provident funds, retirement annuities and endowments, personal investors cannot hope to make the right decisions to balance their equity investments.

Investors should become more aware of how their funds are invested by professionals . Only when you understand the bigger picture can you make a different decision when buying your own equities. Repetition of a fund manager's strategy brings tunnel-vision rather than balance to investment portfolios and the irony is that some , who seek balance with their own equity and unit trust purchases, still stay in a rut because they fall into the trap of duplicating their overall strategy.

Most people don't think of themselves as players on the stock market. They forget that the underlying investment of instruments like annuities, retirement funds and endowments are likely to be blue chips or other large shares in companies.

Individuals tend to hold equities on a once-removed basis. It is unusual for them to know the strategy being followed by investment managers or the thinking behind the choice of investments, which support their annuities and endowments.

An individual may invest in unit trusts or shares. They may understand the need for investment diversification and may even make equity investment decisions that appear to follow the principles of prudent diversification. But they may be duplicating an existing strategy and also making conservative decisions while investment managers are also pursuing a conservative course. Thus, to achieve the full benefit of proper diversification, the investor could become a lot more adventurous.

Currently, I am carrying out an investigation for an investor for R2,1million. The easy course of action would be to look at this in isolation, but if I am to do my job properly, I have to acquaint myself with equity exposures already in place via endowments, annuities and pension funds. I also have to uncover the underlying investments already being managed.

Perhaps I will find that my client is already heavily invested in blue chips. A recommendation that he put a high proportion of his money into more blue chips would then be inappropriate.

Proper diversification is impossible unless you see the full picture. Hundreds of options are open, but if you are locked in a single strategy, you are just buying more of the same.

lThe writer is financial adviser of Bryan Hirsch Colley and Associates. Email bryanh@bhca.co.za or call 011-880-4888.

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