Introduction

Steer Capital has three fundamental investment beliefs. Firstly, we believe that over time Beta will outperform cash. Secondly, proper balance between different Beta sources forms effective portfolios over time. Lastly, Alpha (the way active managers add value) is a function of active risk management. These are fundamental beliefs which directs our strategic thinking when constructing portfolios.

Given enough time, beta outperforms cash

This is and should be the fundamental motivation for any investor to invest. An investor with available capital (cash) should be motivated to invest his capital in a market or a combination of markets with the belief that it will deliver superior returns than the original cash investment. It is clear from looking at history, that market risk (Beta) has outperformed the risk-free rate over time. There is therefore an incentive for investors to be exposed to Beta over time. This incentive is called the risk premium and has been a reliable source of return for investors over the long term.

Risk premium = Total return – Risk free rate

The assumption therefore that Beta will produce a reliable risk premium over time is part of our core investment believe system. The one important condition for Beta to work for the investor is enough time. The reason time is important is that the risk premium delivered by any beta source (asset class) does not come in a straight line but has a certain variability attached to it. Risk premium is therefore cyclical in nature. The primary way of reducing the variability of the risk premium in a portfolio is to properly diversify a portfolio between different sources of risk premia (asset classes).

The above graph on the left illustrates the rolling 12m risk premium of Gold (ZAR) and the FTSE/ALSI Top 40 Index. This underlines the importance of proper diversification, and the above two assets display the ability to produce risk premia over time and at different periods and therefore makes it an ideal blend within a portfolio. The graph on the right illustrates the compounded growth of SA Equities, gold, and cash for the past fifteen years. Both beta sources outperformed cash over this period, which illustrates that an investor was rewarded with a handsome risk premium way superior than cash.

Click here to read more about our beliefs around diversification and the construction of effective portfolios.