The cost of peace of mind

In this issue of Collective Insight we seek to examine the concept of “peace of mind” in investing and, more specifically, to explore the trade-offs investors face when they select investment products designed to deliver what they believe “peace of mind” represents to them.

It’s a vast topic, as evidenced by the large submission of articles the editorial advisory committee received. The overall high quality of submissions made it a difficult task for us to narrow down our selections to comply with space constraints. Investors’ tolerance – or rather aversion – to several risks (but especially the risk of losing capital) is perhaps one of the key motivators why achieving peace of mind ranks high for several individuals. Our opening article, written by Neil Horne, of H1 Capital – “The panic premium” – provides a well-expressed discussion on the negative impact fear (including the fear of risk itself) has on the practices investors employ as they seek to allay that fear. Horne’s article is particularly topical in light of the volatility of equity investment returns over the past two years.

Having established what motivates certain investors to go in pursuit of achieving peace of mind, the next step in exploring this topic is to examine how investors go about achieving that particular objective.

Products designed predominantly to appeal to investors seeking to achieve peace of mind are widely available in the marketplace – but how well do they really deliver on their promises? The first article, “How absolute are absolute return funds” written by Monica Matthews of Alexander Forbes, provides a thorough analysis of absolute return funds in South Africa.

The author concludes inter alia absolute return funds aren’t the risk-averse investors’ panacea and that “those (absolute return) products encompass a broad range of objectives and strategies and investors must be aware of what they’re buying into”.

The second article covers hedge funds and is written by Tom Schlebusch, of Blue Ink. Titled “What exactly do hedge funds hedge” it’s a necessary read for all investors who have contemplated investing (or indeed already are invested) in those products. His analysis should certainly assist in minimising “the misconception” about hedge funds he feels continues to prevail in the market and among investors.

The last product-related article covers smoothed bonus portfolios. Here Danie van Zyl, of Sanlam Investment Management, explains such products in detail, and provides potential investors with a framework for assessing their suitability.

An area of increasing interest and utilisation in the financial planning of SA’s retirement fund investors is the method of life-stage investment strategies. Martin Poole, of acsis, in his article – “Life-stage strategies – know the implications and consequences” – provides a comprehensive and balanced discussion of the risks to be alert to in life-staging as an investment strategy.

The penultimate article of this quarter’s publication is written by Costa Economou and Shawn Levitan, of Colourfield. In their article – “The cost of peace of mind” – Economou and Levitan introduce one strategy overlooked by defined benefit trustees that matches the funds’ liabilities to pensioners.

But as the final article by Jarred Glansbeeck of Riscura explains in his “The cost of simplicity”, not all liability matching strategies really do manage the risk trustees should be concerned with. Glansbeeck identifies what we should be concerned with.

While some investors attach a higher value than others to experiencing peace of mind in relation to their investments, what’s becoming increasingly clear is those investors often don’t calculate the cost involved in attaining that apparent state of mind.

We hope this issue will trigger some questions and prompt further investigation. However – no matter how you define or characterise it – it would seem “peace of mind” is achievable in investing. But like most things in life, it’ll cost ya!

DELPHINE GOVENDER

Allan Gray