Lump sum poser

A Fin24 reader asks:

I am 75, don't have debt and my pension is sufficient. I have cash assets of R1m. What would be the best investment under the circumstances? The return should at least beat the inflation rate plus tax (4%).

Marius Kruger, an accredited financial planner with PSG Konsult in George, responds:

A portfolio that will beat inflation by 4% will have to include some risky assets.

If we look at the historical returns of asset classes:

 - Shares beat inflation by 7%

 - Property beat inflation by 3%

 - Bonds beat inflation by 2%

 - Cash returns were equal to inflation.

Some fund managers have shown that they can outperform the JSE's All Share [JSE:J203] index by more than 5%. These fund managers will have the best chance to beat the index and have a big impact on the return of the portfolio.

When we look at risk, shares and property will hold the biggest risk in the portfolio while bonds and cash offer the smallest possibility of capital loss.

Shares will therefore have to make up around 60% of any portfolio that has to beat inflation by 4%. This also includes foreign shares.

The way to approach it is to identify fund managers of unit trusts invested in shares, and which have a track record of outperforming the average return of shares over one, three and five years.

You also have to identify three fund managers which don't have the same investment style. You have to combine a fund manager with a value investment style (someone who seeks to purchase a shares in a company for a price below its intrinsic value) with a fund manager who has a growth focus (picks shares that have high expected future growth rates).

The part of your portfolio that has exposure to different investment styles has to be around 30%. Some of these funds will also offer offshore investments, which will give you good exposure to the current low valuations of international shares as well as hedging against any weakness in the rand.

For the remaining 70% of your portfolio allocation, choose fund managers which have a mandate to allocate a maximum of 65% of their assets to shares, but can reduce their exposure to 35% if needs be. These fund managers should also have a maximum of 25% foreign exposure in their funds.

By following this strategy, you are lowering your risk because the fund manager can protect your money by choosing assets like bonds which are not correlated to shares and don't react in the same way to economic developments.

The fund manager can also follow tactical strategies within the fund to capitalise on certain opportunities and avoid risks. Again, you can allocate this part of your portfolio to three fund managers which have outperform the average return in their sectors over one, three and five years.

This portfolio gives you the benefit of enough exposure to shares to beat your inflation-linked target return, coupled with the necessary protection through good diversification, international exposure and fund managers with different investment styles.

 - Fin24