The role of cash in an investment portfolio

In the context of a portfolio, and the uses of its constituent parts, we can broadly distinguish between cash assets for short-term cash requirements (such as income) and growth assets for longer-term objectives (such as capital growth).

A clear distinction between assets and their roles also reinforces investors’ discipline not to access long-term growth assets before they have been allowed the appropriate amount of time to achieve their intended outcome of growing the real value of capital (after taking inflation into account).

What are the risks in fixed-income markets?

Cash and fixed-income solutions are supposed to be the portion of a client’s portfolio with the lowest risk. No one wants to feel that their cash funds might be unsecured or that their immediate income is compromised. We are very mindful of this in our approach, as there are also risks to investing in fixed-income markets that need to be mitigated, like counterparty risk and liquidity risk.

Our approach to mitigating these risks is focused on diversifying across money managers and securities, and using an efficient unit trust structure that is well regulated and goes through daily risk and compliance checks.

We often see investors in the open market chasing higher returns or yields without understanding the risks which can lead them on the wrong path, so we assess the complexities and adjust our portfolios accordingly. A superficial assessment is insufficient – deeper security, asset class and market knowledge as well as a deeper understanding of the potential risks is needed to maintain an adequate balance between risk and returns.

What should investors keep in mind when choosing a low-risk investment product?

Consider using a solution that offers diversification and a good balance between risk, return and value for money. As part of your selection process, understand – at a minimum – what the counterparty, liquidity and reinvestment risks are, or make use of a wealth manager who can investigate these on your behalf.

It is also very important that investors don’t lose sight of their financial planning goals along the way. Finding a well-rounded solution is better than finding a top performer that deploys excessive risk. The yield you are chasing may be more than what you need, and is taken at additional risk that may not be fully understood.

Knowing where your real return or growth will come from is important. In our process, it is predominantly the growth assets in a client’s portfolio that are focused on long-term objectives. Remember that the goal of the cash portion of the portfolio is first and foremost safety and security.

What does PSG Wealth offer in this space?

PSG Wealth offers a wide array of cash solutions, but our flagship solutions are the PSG Wealth Enhanced Interest Fund of Funds (FoF), which is a very conservative money market-like solution that enhances yield by investing in slightly longer-dated investment grade deposits, and the PSG Wealth Income FoF, which can make use of other asset classes in moderation to maximise risk-adjusted returns.

These solutions are unique in that they were specifically designed to implement our advice strategy as efficiently as possible. For example, when considering that a typical client draws income by way of monthly payments, the average holding period for that cash for the year would be 200 days, which is longer than a typical money market fund’s maximum holding period of 90 days.

We therefore built our mandate around extending this duration allowance to earn additional interest and focusing on investment-grade instruments to reinforce the quality of the securities. This has also resulted in improved potential returns and reduced risk, and negotiating very aggressive portfolio management fees with the underlying money managers to ensure these portfolios are also cost competitive.

This approach of considering potential performance, risk and fees forms the foundation of our thinking when constructing our portfolios, and results in well-balanced and efficient funds.

How does PSG Wealth’s offering help clients?

Our solutions are very well balanced and have outperformed market peers without taking undue risks. We have achieved this by using world-class managers in our solutions who have a demonstrated track record of risk awareness and outperformance, which ultimately generates enhanced yields in an efficient manner and without excessive risk.

Most importantly, our solutions are well aligned with our advice process, which allows us to deliver on what was planned for in clients’ financial plans without generating unrealistic or unsustainable returns or taking unwarranted risks.