Swinging to Smart Beta? Consider this new Satrix fund
Jason Liddle runs the Satrix Low Equity Balanced Fund which was launched at the end of July. It is targeting pent-up demand for a passive fund that protects capital but focuses on achieving growth of inflation plus 3%. In this interview he explains the fund is not an alternative place to park cash. It is positioned not only as a low-cost alternative but as the home for a cautious slice of every portfolio. – AH
ALEC HOGG: It's a warm welcome to Jason Liddle, Satrix's Portfolio Manager for the Low Equity Balanced Bund. Let's talk a little bit about you before we go into the Fund itself. A very famous name in Asset Management – your surname, Liddle. Any relation to the man who's at Allan Gray?
JASON LIDDLE: I don't think so, but I do get that quite a bit. I get that gibe quite a bit, but there aren't many of us Liddles around, but I think that the great-great-grandfather Liddle…I think there are some overlaps somewhere.
ALEC HOGG: Your fund: it's only recently launched, only on the 30th of July. What was the thinking behind this new Low Equity Balanced Index Fund?
JASON LIDDLE: Well, we certainly are taking note of how Multi Asset Class Funds are really enjoying favour in terms of flows over the last five years. As at the end of June, 47 percent of assets in local CIS portfolios are actually made up of Multi Asset Class Funds, so we feel that a passive multi asset class variant is most certainly, long overdue. We did launch our High Equity Fund, we experienced a big pipeline of business there and for our Low Equity Fund in the next few months, and there is an additional pipeline of business. As a passive provider, we need to answer the question about whether we can provide clients with an attractive investment proposition and we are most certainly of the view that we can. The first reason why I would offer that is due to our investment approach – being Strategic Asset Allocation.
Many studies suggest that strategic asset allocation is the primary driver of a client's risk and return experience and these guys from Vanguard and others that have pegged that contribution to around 90 percent. The other thing that I don't think many appreciate is that active managers themselves are not equally and highly skilled at every single, individual asset class or even possibly at combining those asset classes. Firstly, our strategic allocation is not only composed of those asset classes that are necessary for maximum diversification. At the same time, we use indices that proxy those asset classes that are highly representative of that asset class, as well as highly competitive in their own right For instance, domestic property is one of the asset classes and one of the indices that we used to proxy would actually classed as a SAPI or a JT53.
Much has been written and spoken about SAPI, but in itself, it's is a very competitive benchmark, which active property managers are struggling to add value against.
ALEC HOGG: If you take it from the investor's perspective and your fund is low equity, clearly the idea on one hand is to get a reasonable return on income. How much equity do you have in this portfolio? In other words, what percentage of the portfolio is actually in shares?
JASON LIDDLE: Within our portfolio, we have 25 percent exposure to South African Equity and we have ten percent exposure to International Equity. In the International Equity component, we use the MSCI World Index as the proxy for that asset class.
ALEC HOGG: Just looking at the portfolio, I see you have Naspers and MTN together making up about five percent of the total portfolio. Sasol's in there with almost another two percent. Put that all together, and you have roughly seven percent of your portfolio in those three stocks. You must like them.
JASON LIDDLE: I still feel that what this Low Equity variant offers – even inside the equity carve-out – is an agnostic tracker for the SWIX Index. We don't track the SWIX Index itself, all 163 stocks. What we do is we have a look at the top 110 stocks and use an optimised approach to track the SWIX Index and we've done that with a very high degree of success. The intention at all times is to remain disciplined about us tracking the SWIX Index. The reason why we chose the SWIX Index is because of the fact that it offers more brick, over and above the All Share, so we remain agnostic at all times and we're merely following the market cap weighted SWIX Index.
ALEC HOGG: All right, so it isn't the fact that you like those shares. It's the fact that you've been focused on this SWIX Index, which means you have to put them in.
JASON LIDDLE: Absolutely.
ALEC HOGG: And then the percentage…so we've gone through 35 percent of the Fund. Where is the other 65 percent of the Fund invested?
JASON LIDDLE: For the remaining components, we have domestic bonds that make up about 20 percent of the portfolio. What we've done with the Fixed Interest Asset class is that we split out nominal bonds and inflation-linkers, so on top of the 20 percent nominal bond exposure, you have exposure to linkers at ten percent. One of my points before was that not all asset managers are equally and highly skilled at every asset class. So it makes real sense for linkers to be in a portfolio because of the systematic factors that exist inside that specific asset class. Since liquidity is at such a high premium as well, we can offer that to the client at a fairly significant weight and one that is going to add to their long-term objective. We have cash at 20 percent.
As you mentioned, drawdown is extremely important and is becoming more and more important in the focus of many investors (retail and institution alike). We're not reinventing the wheel here, but one needs to manage that drawdown. It's very simple. If you have R100 and you lose R50, your money needs to work twice as hard to get back to where you were and that's certainly one of the principles we'd like to employ through our strategic asset allocation. As I mentioned before, international equity at 10%, international bonds at 5%, and international cash at 5%. The one thing I just want to offer there is to talk about the extent to which exposure to foreign asset classes contributes to diversification and especially, our currency in how it adds to further diversification for clients.
ALEC HOGG: Yes, and overall, it is for the cautious investor. Would it necessarily be for someone who just wants to park money on the side, as an alternative to a Money Market Fund, or not?
JASON LIDDLE: At Satrix, we always talk about trying to partner with clients and one of the things that we want to keep clients sober about is not to try to churn one's money. It's definitely a product we would like clients to have a medium to long-term view on, when they're actually holding it. I spoke about one of the principles (i.e. it's not reinventing the wheel), but it's highly effective. One of the other principles is not to churn because over the very long-term, studies have suggested that churning one's portfolio has been a huge destructor of value at the end of the day. In terms of our proposition, if the client would like to partner with us, we would like to see the client with us for the medium to long-term and we feel the experience will be so good that it will be more towards the long-term.
ALEC HOGG: So it's more a slice of their portfolio that they want to keep insurance as an income-generator and protect the capital, than a place just to park money rather than in a Money Market Fund.
JASON LIDDLE: Sure, and I think every client is unique in terms of their need. They need to sharpen their pencil on the objective they want to achieve. However, whether you actually use it as a split-funded approach or as a portfolio that's rather tempered in its equity and you would like to up the ante in the rest of your portfolio, it can perform on both fronts.
ALEC HOGG: Jason, just to close off with, you do have your own benchmark that was specifically designed for you and why so?
JASON LIDDLE: I think this talks strongly to the rigour and discipline that we would like to put out there, to the market. If we have the All Share Index and clients are tracking it, there's a fair amount of discipline there. Now, with these bespoke benchmarks in the Multi Asset class space, it's an independently calculated benchmark, which is relayed to us and which we religiously and in a very disciplined fashion, try to track. We just want to make sure and we would like to convey to clients that there's no room for us being subjective about things, or letting asset classes drift past when we actually said they would. It's an objective process. It's an objectively calculated benchmark, which we track and over time – speaking to that discipline – we believe will help clients reach their objective.
ALEC HOGG: How has that benchmark performed over the last five years?
JASON LIDDLE: Relatively to peers and in absolute terms, it's performed extremely well in backtests we've done. I think the important thing to appreciate is that it wasn't a wholly backward-looking exercise and an in-sample optimisation that led us to this allocation. We also looked at how peers have varied their individual asset class allocations over time and through different cycles, and we've looked at the drawdown and accompanied upside benefit that would succeed it, to come out at this allocation. As I said, term is all-important. Over the medium to long-term, we understand that it's a peer game. As I said before, we need to answer the question about how attractive this investment proposition is, and over that period of time, it's done very well, relative to peers. It's been consistently top half in terms of our back-tested experience, but I think we can also remain sober and say 'in a Low Equity portfolio like this, one should look at a real return or expectation of about CPI+3 to about CPI+4 percent and in our High Equity variant CPI+4 to about CPI+6 percent.