Page 139 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Understanding Asset Allocation

Investors attracted to funds offering exotics need to
be aware that price discovery is often opaque and Arbitrage
asset valuations educated guesses at best – Arbitrage is the activity of profiting
particularly in the case of collectibles, where prices from differences in price when the
achieved at auction can fluctuate wildly. Even same security, currency, or
exotics that are accessed via registered ETFs or commodity is traded on two or more markets.
mutual funds overseas are typically more volatile Where discrepancies between different markets
than traditional asset classes.
appear, the arbitrageur will step in to exploit the
situation. The arbitrage dealer’s selling price is
Balancing the Asset Mix higher than the buying price. By taking advantage
of momentary disparities in prices between
Increasingly, unit trusts are used not so much as markets, arbitrageurs perform the economic
discrete investment destinations but as the building function of making those markets trade more
blocks of broader investment strategies. In the efficiently.
investment environment of the second decade of the
third millennium, relatively few investors own a
single unit trust – more typically, a balanced portfolio is constructed for an investor by using several
unit trusts that, together, match the investment profile and financial objectives of the client.
In this environment it is not enough to know the different asset classes and their characteristics,
one must also understand how they work together. This is particularly relevant when it comes to
retirement funding products and annuities, where the regulatory framework and ethical
considerations both demand that investors receive appropriate advice and suitable products.
In short, an “either/or” view of asset classes is seldom applicable. While there are no doubt still
astute investors who shift investments between asset classes according to market conditions (eg,
retreat into cash when equity markets are volatile or declining), the majority rely on long-term
asset allocation for protection. In practice, only a small minority of investors actively switch
between asset classes in response to market cycles; most assume that the investment choices made
by fund managers and advisors will see them through.
This reality makes it imperative for financial advisors to grasp the complex relationships
between asset classes on the one hand, and the risk capacity, risk appetite and investment goals of
individual investors on the other. The solutions are seldom simple. Interest-bearing products
provide safety but typically do not produce enough growth in the long-term to adequately provide
for retirement needs.
Conversely, the volatility of equities means that too much exposure at the wrong time can
seriously erode retirement capital. To further complicate matters, costs and prudential regulations
must be taken into consideration, especially where retirement products are involved.

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Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts