Equity Funds

Equity funds provide exposure to specific sectors of the stock market such as resources, financials or industrials. They may also be managed according to specific themes. For example, value funds will have a bias towards stocks which trade on low P/E ratios and dividend yields. Greater focus will be placed on assessing normalised earnings prospects through the business cycle and quantifying them relative to current share prices. Growth funds may be more momentum-orientated favouring stocks in fast growing industries or regions. Specialist funds may be more risky than general equity funds which provide broad exposure to the market, especially if they are sector-specific.

Income Funds

Income funds provide exposure to either short-dated corporate paper or to longer-dated corporate and government debt, or a combination of the two. Fixed interest funds are generally seen as low risk investments and when compared to equity or property funds, this is usually true. However, the risk and return characteristics of fixed interest funds vary widely and should be understood prior to making an investment:

• Duration can introduce volatility if interest rates deviate substantially from expectations.
• Low volatility of past returns is not always a good risk indicator – this is because credit risk is only fully appreciated when corporate or governments default.
• Interest rates can also move unexpectedly and substantially in adverse market conditions which may not have been experienced recently.
• The quality of the corporate paper held, quantified by credit agencies, is an important indicator of potential defaults.

• Any potential returns in excess of cash come with risk.

International Funds

These funds are South African-based but provide exposure to offshore assets. Consequently, fluctuations in the rand is a significant factor affecting returns. Another factor is the asset mix between offshore cash, bonds, property and equities. Cash and bond funds generally experience the least volatile hard currency returns, whilst those holding only offshore equity will show the greatest volatility in hard currency. International asset mix funds provide diversified exposure to offshore cash, bonds, equity and property with varying degrees of hard currency volatility.

Multi-Asset Funds

Many investors choose to leave the decision of how much to allocate between cash, bonds, property and cash to professional investment firms.

Multi-Asset funds provide exposure to equity, property, bonds and cash, generally both locally and offshore. Investors are protected by diversification across asset classes and regions. If one asset class or region underperforms, another may outperform, thus underpinning total portfolio returns.

The volatility of asset mix funds depends on the combination of cash and bond holdings, relative to more risky holdings in equities and property. Fund mandates with high equity limits generally have higher volatility. Offshore exposure, even if only invested in cash, can introduce currency volatility as a consequence of currency fluctuations.

Property Fund

The Momentum Property Fund has roughly 75% of its exposure in large-cap, blue-chip property counters, but has also been selective in investing in new property listings which account for 15% of the fund. The offshore exposure is taken through Capital Shoppings in the UK and NEPI.

The research process and philosophy in property is concentrated on investing in those companies that are located in strong geographic nodes and have the potential to manage their vacancies and improve on rentals. The fund does not sacrifice yield at the expense of quality and ensures that the selected property shares are defensive through various property cycles.