Risk and Return...This chart is a useful guide to investors as it shows the risk versus return ratio of the 24 general equity funds that have been operating for three years or more. (Funds in existence for shorter periods are excluded because their ratios would be misleading.)
General equity funds invest in a wide range of shares listed on the Johannesburg Stock Exchange. These funds are the most established and carry a lower risk because they spread their assets over a range of shares, aiming for a balance between growth, income and stability - trying to minimise risk through diversification.
The chart depicts the returns achieved by each fund relative to the risk taken by the fund manager in achieving that return. The risk, in this instance, is the volatility of the fund's returns over the three-year period. The dotted lines show the average risk and return of the 24 funds, and divide the chart into four quadrants. The ideal place for a fund to be is at the top of the upper left-hand quadrant - because this gives the investor the highest return for the least amount of risk. Seven funds are comfortably nestled in this quadrant, giving their investors above-average returns at a lower risk.
New in this quadrant is the Syfrets Prime Select fund, which was reclassified (together with five other funds) by the Association of Unit Trusts from a specific equity fund to a general equity fund earlier this year. Since this fund is now older than three years, it can be included in the risk versus return analysis. The funds in the bottom left quadrant are producing a lower-than-average return, but investors are being compensated with a below-average risk. The funds in the bottom right quadrant are not doing their investors proud as they are rendering lower-than-average returns at a higher-than-average risk. Funds in the last quadrant, the top right of the chart, are producing high returns, but at a higher than average risk. While a fund's performance is important to the investor, consideration should be given to the risk taken by the fund manager to achieve that performance. The investor has to weigh up whether the returns warranted the risks taken. Generally, if a fund is managed at a high-risk level, the investor expects to be compensated with a higher-than-average return. Most investors prefer to limit exposure to high-risk funds and put the bulk of their savings into funds which carry a more comfortable ratio of risk and return.
It must be pointed out that a high-risk fund is not necessarily a bad one - provided it renders you with a correspondingly high return.
Choosing the right fund requires a lot of research. You can do this yourself if you believe you have the skills, or hire a good, independent financial adviser to do the job for you. Top of page