September 21, 2004

By Craig Pheiffer

Tomorrow the celestial bodies align themselves to engineer an equal length day and night for all on the planet. The northern hemisphere will experience its autumnal equinox and in the southern hemisphere we will greet the real onset of spring with the vernal equinox.

The sun will rise exactly in the east and set exactly in the west and those nipping out to the corner cafe on the equator will find that they have no shadow.

For one day the daylight hours will match the night hours and the sun and moon will work even shifts. At least from one point of view, the world will be in balance "The most important balance to get right is between the asset classes"

Unfortunately, balance in investment portfolios is not brought about by the movement of the stars and planets and investors need to actively manage their portfolios and rebalance them on an ongoing basis as the markets evolve.

What constitutes "balance" in individual portfolios is highly subjective and is determined by personal investment objectives, time horizons and risk tolerances.

The most important balance to get right is that between the various asset classes. In other words setting the right mix of bonds, equities, property, cash and other investments which may not so easily be classified into one of these categories.

Included in this higher level portfolio balancing decision is also the proportion of the portfolio to be invested offshore.

The secondary portfolio balancing activity relates to finding the right mix within each asset class, that is picking the right sectors and shares in your equity portfolio or positioning yourself correctly on the bond or money market yield curves.

The equity market as a whole is currently trading at a level equivalent to just over 14 times earnings, right in the middle of the 9 to 19 times earnings range of the past decade and finely balanced, one might say.

The market looks to have more legs, particularly with the local economy set to improve further and with the rand seemingly having ended its persistent spiral of strengthening.

Being more in fair value territory, however, means value opportunities will diminish and market risks will mount as the index reaches further into the thinner atmosphere.

In the bond market, investments are better restricted to the short end of the curve and to issues that provide a yield pick-up over government stock.

Given the more attractive yields available elsewhere in the markets, cash holdings should generally be kept to a minimum.

At an individual stock level there is much benefit to be gained from acquiring the shares in a chosen sector that offer complementary investment opportunities.

Not only does this diversify away from individual stock risk but it also provides a broader, more balanced, exposure to a chosen sector.

There is scope in a portfolio for both Anglo American and BHP Billiton, for example.

While they do have areas of overlap, Anglo additionally brings gold, platinum and paper and packaging exposure, while BHP Billiton provides exposure to petroleum and aluminium.

A further example is in the food producers and processors sector where the likes of AVI and Tiger Brands are highly complementary.

Both have fishing interests and numerous retail food, drink and snack brands but Tiger Brands incorporates medicine and healthcare through Adcock Ingram and AVI has packaging (Consol) and cosmetic (Indigo) interests.

The final day and night balancing act of the year serves as a good reminder that individual investment portfolios need to be rebalanced from time to time. And after a near 15 percent gain on the JSE Securities Exchange over the last two months, there's no time like the present.

Craig Pheiffer is the chief

investment strategist at Sasfin Frankel Pollak Securities