The investment mandate

Terms such as "cautious", "conservative", "balanced", "moderate", "opportunity" or "growth" are commonly used for investments, but they are confusing, because there is no quantifiable outcome or result. Invariably there is no clarity with regard to proposed return and risk expectations of funds over a defined period. This may lead to differences in interpretation, which constitutes a risk for both the advisor and client.  Though not a guarantee, both advisors and clients should have clarity as to what is expected in real terms. 

Each investment strategy quantify the mandates in the following ways:

  1. Expected return relative to inflation
  2. Volatility attached to expected return and the probability of negative performance.  We do not consider volatility as risk; it is an attribute we could manage
  3. Time frame for the particular mandates

In order to address this problem we formulated specific investment mandates with clear targets. The targets use inflation as benchmark for measuring performance; i.e. above inflation return targets known as real returns.  Finsolnet calls these "investment strategies" and their aim is to work against the effect of inflation over time.
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Inflation erodes your future purchasing power.  We know that R1 today is not worth R1 ten years from now.  For example, at an average inflation rate of 7% per annum, the purchasing power of R1,000 is reduced to roughly R500 after 10 years.  That is 1/2 the the initial purchasing power (in finance we refer to the "rule of 72").  The "rule of 72" is a method for estimating an investment's doubling time, but can also be used for decay to obtain a halving time. The rule number (72) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for decay or increase; e.g. 72/7 = 10.3 years.  Although scientific calculators and spreadsheet programs have functions to find the accurate period, the rule is useful for mental calculations.

We use CPI (Consumer Price Index) as the benchmark in order to measure real growth. The guidelines for domestic investments are as follows:
Domestic Strategies Term for Capital Retention Term for Target Return
CPI +2% to 3% 12 months 24 month moving average
CPI +4% to 5% 24 months 36 months moving average
CPI +6% to 7% 36 months 60 months moving average

To ensure a high degree of diversification, Finsolnet and Sygnia have acquired the services of reputable asset managers in South Africa and abroad. The managers differ in style of management, thus complementing one another.

 

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