TFSAs: apples and oranges

It’s that time of the year again when the finance media encourages you to maximise your annual R33,000 contribution to your tax-free savings account (TFSA) before the tax year-end deadline on 29 February 2020. Bear in mind, however, that what you’re invested in is as important as how much you invest.

As Gustave Flaubert once said, “One mustn’t ask apple trees for oranges”. Likewise, as TFSA products differ greatly in terms of underlying investments and fees, it’s important to take a look at the various asset classes you’re invested in to ensure that the portfolio is suited to your individual financial goals. This way, you can be confident – whatever the market is doing – that your investment strategy is sound and that you will reap the desired harvest in time.

For example, on the assumption that all options are more or less the same, many long-term investors have simply selected a TFSA offered by their bank, and are unwittingly investing in a cash portfolio. This means that they are missing out on the far greater potential benefits of tax-free returns on higher growth investments, such as investments in global companies or fast-growing economies through equities.

Asset allocation

Ultimately, you need to know what you’re invested in, and what the risks and drivers are of your investment. Then you need to consider if this investment will help you achieve your long-term goals.

Asset allocation is central to ensuring the right risk-time-return recipe and, at Cannon Asset Managers, we first examine the characteristics of asset classes and their risk and return attributes, and from this build fit-for-purpose portfolios. We also consider the correlations, covariance and other diversification attributes of the various asset classes to ensure that our portfolios are truly diversified. As an example, adding Alibaba Group to a portfolio that already is invested in Tencent Holdings means you haven’t diversified much, as the two investments behave in a very similar way.

With this in mind, our three TFSA portfolios offer effective, low-cost, multi-asset solutions for investors across the risk spectrum. Each TFSA portfolio holds a tailored blend of Exchange Traded Funds (ETFs) that own or mimic the performance of indices, capturing the return attributes of the various asset classes (such as equity, property, bonds, commodities and cash). These ETFs are held in carefully selected weights designed to meet the objectives of each bundle.

Global Growth TFSA

Asset Class Exposure

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The Global Growth Portfolio offers the highest compounding potential. This portfolio is invested in high-growth assets across countries and in different currencies, including the dollar, yen, euro and Swiss franc.

In this portfolio, the emerging market equity weight is high at 30.7%, given that China, India, Indonesia, Mexico, the Philippines and others is where income growth, new markets and industrial dynamism are likely to come from over the next 20 years. The almost 10% holding in precious metal offers powerful defensive capacities for when the going gets tough, and the 43.7% developed equity component provides steadier equity returns from big names in mature markets.

Balanced Growth TFSA

Asset Class Exposure

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The Balanced Growth Portfolio seeks steady capital growth over the long term through investing in all major asset classes. The portfolio is invested in all of the major asset classes across countries and currencies. However, the portfolio holds safe assets – such as cash and government bonds – in a higher weight than the Global Growth Portfolio. This makes the portfolio Regulation 28 compliant, which means investors can also invest in this portfolio through a retirement annuity and take advantage of the tax benefits of that investment vehicle.

Accordingly, the Balanced Growth Portfolio is 70% locally invested and 30% offshore invested. This offshore allocation is strategically invested in all major asset classes globally. The 70% local exposure is invested in bonds, property, equities, cash and precious metals. Compared to the Global Growth Portfolio, the Balanced Growth Portfolio has a greater exposure to the local economy and better suits those investors who expect to spend their investment savings in rands.

Capital Preservation TFSA

Asset Class Exposure

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The Capital Preservation Portfolio aims to preserve wealth. As such, the key objective is to defend against inflation. For this reason, the return objective of this portfolio is to grow at 2% ahead of inflation, which makes this a conservative portfolio.

Consequently, the portfolio does not hold any global equity, as this asset class is extremely volatile, and is generally unsuitable for a low-risk, short-term investment. The portfolio offers asset class diversification through local equities, bonds, property, cash and precious metals. This ensures that this portfolio has low volatility compared to balanced solutions, and that it is designed to deliver steady growth in capital.

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