An investment operation is one which, upon thorough analysis, promises safety of principle and an adequate return. Operations not meeting these requirements are speculative. – Benjamin Graham

This statement by Prof Graham, arguably the father of modern investment management theory, forms the basis upon which Amity Wealth manages investments. We believe that investment management must include the management of both risk and return. We therefore designed our investment process to quantify both the probability of the potential loss of capital and the realistic returns that can be expected.

The starting point of any investment strategy is to define one’s investment philosophy. The following section describes how we define certain key investment factors that form the basis of our approach to investments in general. Investment objectives – Investors have two primary investment objectives – income and capital growth. Amity Wealth’s entire investment objective revolves around delivering consistent income and capital growth, where investment returns outperform inflation and where the capital invested retains its purchasing power.
Benchmarking – We do not believe that returns should be benchmarked against an index or be positioned relative to other funds. A client’s benchmark should be whether he/she has achieved the required rate of return on which his/her investment plan was based. If this return is not reached, the client is unlikely to achieve his/her objectives. However, the minimum return required over the medium to long term must be to outperform inflation net of tax and net of cost. It is for this reason that Amity’s investment solutions are managed in accordance with targeted benchmarks.
Investment term – We believe that, given the volatility of markets, investments cannot be satisfactorily managed if the investment term is shorter than two to three years. Funds required over periods that are shorter than this should ideally be invested in the money market. Optimal value can only be added if the investment term is five years or longer. An investor’s most important consideration should be time in the market, not timing the market!
Risk – Risk has many definitions. Too often investors fall prey to their own fears and lack of knowledge. We do not define risk in terms of short-term volatility – which is driven by people’s emotions – but rather in terms of the following two principles:

a. Risk is the probability of losing capital value over a client’s selected investment term. Depending on the client’s investment term, certain asset classes may be included which could be more volatile in the short term, but which are essential if long-term objectives are to be achieved. Our investment strategy is designed to limit the probability of capital depreciation over the predetermined investment term.

b. Risk is not achieving an appropriate real rate of return – and could mean having to adjust one’s standard of living. Achieving a positive rate of return while not simultaneously keeping pace with inflation, is often lost sight of as a risk factor. It results in reducing the purchasing power of one’s capital.

In view of the above-mentioned risks, the Amity investment solution is designed to achieve consistent inflation-beating returns while limiting the risk of capital depreciation over the chosen investment term.
Risk Management – We believe that risk is best managed in the following three ways:

a. Time diversification – Because each asset class’s volatility and deviation from the expected return changes over time, risk can be managed by matching the cash flow requirements of the client with the appropriate asset class. Short-term needs can be provided for in money market-type investments whereas funds which will be required only over the long term will be invested in asset classes that will provide higher growth, and which do not have to be realised if the market loses value over the short term.

b. Asset class diversification – Asset classes often perform differently under the same economic circumstances. For example, when equities lose value over the short term, bonds may actually grow. By combining the different asset classes, risk is reduced and the targeted return is achieved with more consistency.

c. Fund manager diversification – Fund managers interpret market conditions and the valuation of asset classes differently and they also have different investment styles. It is for this reason that we believe an active multi-manager approach (i.e., using more than one fund manager in our solution) adds value to portfolio management as it reduces risk significantly.

These principles are all incorporated in every client’s unique investment strategy.
Fundamental Analysis - We believe in long-term investment. Therefore, we believe in the value of fundamental analysis. This entails a scientific research process to determine the fair value of asset classes and specific investment instruments. Only fund managers with sound analytical, value-based processes and extensive research capabilities are included in our Fund of Funds.
Strategic Asset Allocation – International research has found that the decision regarding which asset classes to opt for is crucial to acceptable long-term investment returns. Deciding how much to invest in cash, bonds, property or equities (locally and internationally) will contribute to better long- term returns than if a specific share or bond were to be held. Our investment strategy is based on this principle. It is applied to our funds, and is based on the outcome of the fundamental analysis. We take the income and capital withdrawal requirements of each client into consideration, as well as his/her risk profile, and then design a specific asset-allocation model to achieve the required investment return needed to maintain his/her lifestyle objective. This is followed by fund selection, weighting, and structuring the individual portfolio.
Tactical asset allocation – Although strategic asset allocation forms the basis of our investment style, we do expect the underlying asset managers to change their asset allocation from time to time when certain asset classes offer better value at lower risk. Our selection of fund managers is strongly influenced by their ability to assess market conditions and recognising changing opportunities. It is a known fact that investment managers interpret markets and valuations differently. It is for this reason that Amity Wealth encourages the underlying fund managers to employ their expertise independently of each other so as to increase the probability of achieving our objectives. Independent strategic and tactical asset allocation by fund managers, all of who aim to achieve the same objective, heightens the probability of achieving the desired benchmarks with a high level of consistency while simultaneously reducing risk significantly. Although this way of working may change the strategic asset allocation of the Amity funds from time to time, it is important to note that it does not change the overall risk/return character of our funds.
Returns – Our investment philosophy is based on the belief that investors can expect historical long-term real rates of return. This means that although an asset class may outperform (or underperform) over the short term, the returns over the long term will revert back to the average. Historically, cash has delivered returns over inflation of +1% to 2%; bonds have delivered +3% to 4%; property has delivered +5% to 6% and equities have delivered +7% to 8% over the long term.

Although it cannot be denied that equities produce the best long-term returns, most clients shy away from the volatility that goes with this asset class. There are, however, mix-and-match strategies that can boost clients’ returns while also reducing risk. Amity Wealth has ways of optimising these strategies for the benefit of our clients.

Based on qualified assumptions, each client’s real rate of return will depend on the precise and appropriate asset allocation in terms of his/her individual investment plan. This becomes the client’s specific internal target return. It is important to note that this will not be a fixed return, but will be expressed as an inflation-plus figure. This is the return required to achieve the client’s long-term financial objectives and is, once again, client-specific as illustrated by the cash-flow analysis. Our client-specific regular reporting is aligned with this internal target return. We are convinced that one cannot manage what cannot be measured. Therefore our client-specific quarterly reports continuously monitor to what extent the required return as expressed in the financial plan is being achieved. The Amity portfolios are designed to achieve these specific target returns with a high probability over the selected investment terms.