In investing there is a lot of jargon and in order to understand the recommendations which I will make when I work with you, it is important that you understand what various terms mean.


A risk adjusted measure of the “excess return” provided by an investment compared with a benchmark. Alpha can be positive, negative, or zero. For example, if a fund has a benchmark of the JSE All Share Index and the fund returns 10% over a period, whilst then Index returns  7%, then the alpha of the fund over the period was 3%.


In investing, your assets are the securities which you own.

Asset classes

In investing, an asset class is a group of securities which have similar characteristics. Major asset classes include equities (shares, stocks), bonds, cash, foreign currencies, real estate (property) and commodities. Many of the asset classes can be sub-divided into sub-classes. For example, bonds can be divided into government bonds, inflation-linked bonds etc… Commodities can be divided into gold, copper, oil, wheat etc..

Two of the most important characteristics of an asset class are its volatility and return characteristics. It is a commonly known that the greater the risk, the greater the return. This can be illustrated by looking at, for example, at South African equities and bonds (although the characteristics are largely the same no matter which major country you look at over time).

Over the long-term, South African equities have delivered the highest real (above inflation) returns of the major asset classes. Since 1925 the average real return from equities has been about 7.9% per year, with the highest calendar return of 93.7% (1979) and the lowest calendar year return of -26.4% (1970). On the other hand, South African bonds have delivered a real return of about  1.7% per year over the same period, with the highest calendar return of 36% (1986) and the lowest of -9% (1994). Cash has averaged a real return of 0.8% per year. (Source: Old Mutual)

From this information it is clear that the asset class which has been the best performer over the long-term (equities) has also been the riskiest over the short-term. Cash has been the least risky over the short-term but then has delivered the lowest average real return over time.

Asset allocation

In investing your asset allocation is the split of your portfolio between the various asset classes. For example, your asset allocation may be 50% local equities, 25% foreign equities, 10% bonds, 10% real estate and 10% cash.

Your asset allocation is THE greatest predictor of your investment characteristics and outcomes

In investing, your asset allocation is the single greatest predictor of your investment characteristics and outcomes. In order to meet your investment objectives, the single most important thing to get right is the correct asset allocation.

Various pieces of research have concluded that a portfolio’s asset allocation explains the majority of a portfolio’s return variability. For investors who hold broadly diversified portfolios, asset allocation is the primary driver of return variability.  In fact, around 88% of your returns over time can be explained by your asset allocation over the investment period and the balance of your returns can be explained by the individual securities, funds, tactical tilts and the like over time.

Vanguard SAA

Determining the appropriate asset allocation for each individual investor and ensuring that the asset allocation is largely maintained over time is a crucial responsibility of the investor and the financial adviser.

Asset manager

In investing, we regard the asset manager (portfolio manager, fund manager) as the company and or person who makes the investment decisions in regard to an amount of investment capital.

In South Africa, asset management companies (Manco’s) are obliged to be registered with an approved by the Financial Services Board (FSB). They are also regulated and represented by the Association for Savings and Investment South Africa (ASISA).

These MANCOs employ individuals and teams (who act as asset managers) to manage unit trust funds and other individual or collective investment portfolios on their behalf.

These funds and portfolios are managed in terms of mandates which describe and define what the funds can invest in and how they must be managed. They will also usually describe the portfolio’s benchmark and objectives. It is the responsibility of the asset managers to ensure that they comply with the mandate at all times and execute their functions within their mandate to meet the fund or portfolio’s objectives.





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