BLUECHIPCLIENT
BLUECHIPCLIENT ENGAGEMENT | Behavioural financeKnowing isn’t doingWhy smart financial advisors should have their own trusted financial advisor.Financial advisors excel at guiding clients towards soundfinancial decisions. However, when it comes to theirown finances, they often struggle to apply the samepragmatic advice they offer to clients. I include myselfin this observation. The cognitive biases, behavioural patternsand challenges that advisors help clients navigate affect theirown decision-making processes. Making objective financialdecisions can be even more challenging for advisors, aspersonal preconceptions may cloud their judgement. This realityunderscores the adage, “A lawyer who represents himself has afool for a client”. The same principle applies to financial advisors.Avoiding uncomfortable topics is a common human tendency,particularly when dealing with subjects that provoke discomfortor anxiety. Retirement planning, estate planning, drafting awill, budgeting, health issues and succession planning are allcomplex and emotionally charged discussions that are frequentlypostponed and avoided by both clients and financial advisors.As financial experts, advisors routinely encourage clients toconfront these difficult issues directly and guide them throughcomplex financial situations. They construct comprehensivefinancial plans that address every aspect of a client’s financialportfolio, providing guidance and accountability to ensureadherence to strategic plans. Advisors educate clients aboutthe challenges and discipline required to follow through onthese plans, emphasising that regular reviews and objectiveassessments are necessary for long-term success.Financial advisors are adept at prompting clients to discussAvoiding uncomfortable topicsis a common human tendency.sensitive issues, including confronting mortality, recognisingdetrimental spending habits, addressing retirement concernsand engaging in succession planning. These conversationsrequire empathy, persistence and the ability to guide clientsthrough emotionally difficult territory. An unbiased viewpointsignificantly enhances the decision-making process.Tom Stoppard aptly remarked, “We give advice by the bucketbut take it by the grain.” Despite dedicating their careers to advisingothers, many financial advisors do not apply the same principlesto manage their own financial affairs. They often overlook theimportance of seeking professional help for their personal financialplans, either due to overconfidence or reluctance to admit the needfor assistance. Cognitive blind spots impede sound financial decisionmaking,leading to procrastination and incomplete planning.A trusted financial advisor provides an objective perspectiveon difficult topics such as succession and retirement planning,educational funding for children and budgeting within a commissionbasedenvironment. This ensures that advisors receive candid,unbiased advice that serves their best interests, even if it challengestheir initial perspectives.John Steinbeck’s observation, “You know how advice is, you onlywant it if it agrees with what you wanted to do anyway,” underscoresthe importance of having an advisor who provides objectiveguidance rather than merely validating preconceived ideas.It is important to acknowledge that financial professionals, likeall individuals, may encounter challenges in organising their ownfinances. Seeking assistance is not a sign of weakness but ratheran acknowledgement of the complexity of personal financialplanning. Just as financial advisors advocate for their clients toseek expert guidance, they should apply the same principle totheir own financial matters. By appointing a trusted financialadvisor to manage your financial situation, you benefit from thesame clarity, objectivity and strategic insight that your clientsdo – why would you deserve anything less? Henda Kleingeld CFP®, FPSA®, TEP, Programme Director:PGDIP in Financial Planning, School of Financial PlanningLaw, University of the Free State36 www.bluechipdigital.co.za
A shift up and to the leftAstrategic allocation to hedge funds offers a compellingsolution, with the potential to shift an investment portfolio’sefficient frontier upwards and to the left, delivering higherexpected returns for a given level of risk.Monthly Global Economic Policy Uncertainty Index. 1While hedge funds offer significant potential, prudent portfolioconstruction emphasises diversification. Regulations, such as SouthAfrica’s Regulation 28 of the Pension Funds Act, often limit exposureto alternative investments to less than 10%. We suggest that investorsmake it part of the allocation in a well-balanced portfolio.The impact of hedge fund inclusion is illustrated in the followinggraph, which displays the efficient frontier for a portfolio comprisingSouth African and global equities as well as South African bonds.The red line shows the efficient frontier without hedge funds. Theblue line shows the efficient frontier with a hedge fund allocation.By incorporating hedge funds, the efficient frontier shifts upwardsand to the left, demonstrating the potential for increased returns atevery risk level.INVESTMENT | EconomyIn times of global economic uncertainty, as reflected by the recent surge in the Global Economic PolicyUncertainty Index, investors seek robust strategies to enhance returns while mitigating risk.BLUECHIPContrary to the common perception of hedge funds as purelyspeculative vehicles, the South African hedge fund industry hasmatured significantly since the launch of the first fund in 1998 [1][2] .Since 2015, the industry has been regulated under the CollectiveInvestment Schemes Control Act (CISCA), ensuring greatertransparency and investor protection. With industry assetsexceeding R100-billion and a substantial portion managed byexperienced investment professionals, hedge funds have becomean integral part of institutional asset owners’ portfolios. Pensionfunds and funds of funds, not people who are known for takingexcessive risk, and not unquantifiable risks, are the biggestinvestors in hedge funds today.A typical hedge fund aims to produce consistent, correlatedreturns, typically at some stated level above inflation or a broadindex of interest (eg SteFi). In pursuit of this goal the managerdeploys the traditional tools of buying shares, bonds and holdingcash, but this is augmented with additional strategies which arenot available to traditional long-only managers. These tools/strategies employed by hedge fund managers include:• Short selling. Profit from anticipated declines or stagnation inasset prices.• Pair trading. Profit from the relative value difference betweentwo similar assets.• Leverage. Amplify returns by borrowing funds, subject toregulatory limits.• Derivatives. Financial instruments, such as options and futures,used for risk management and targeted returns.A strategic allocation to hedge funds can be a powerful tool forenhancing portfolio efficiency. As an example, an investor whoallocated 20% (rebalanced annually) to a hedge fund index [3] atthe end of 2017 would have achieved a compound annualgrowth rate of more than 1% better than the ASISA South AfricanMulti-Asset High Equity Group Average, [4] 9.2% versus 8.1% andthis would have been achieved with less volatility.By understanding their unique strategies and regulated nature,investors can leverage the true potential of hedge funds to achievehigher returns while effectively managing risk. Efficient Frontier: optimal portfolios including and excludinghedge funds.[1] www.policyuncertainty.com[2] Novare SA Hedge Fund Survey 2023.[3] We use an equally weighted index across the South African Long/ShortEquity category as monitored by HedgeNews Africa as our Hedge Fund Index.[4] As published by Morningstar.Francois Olivier CA(SA), CFA,Portfolio Manager,Mazi Asset ManagementStephan Engelbrecht,Portfolio Manager,Mazi Asset Management
