The importance of maintaining a balance of exposures in current market conditions

*This content is sponsored by Investec Asset Management

By Paul Hutchinson*

Short-term performance, a random walk?

While financial studies show that investing in equities is the best way to beat inflation over the long term, determining which will be the top performing asset class over the shorter term is extremely difficult. Consider the relative annual performance of various local and international asset classes over the past 20 years. It appears entirely random – during the 20-year period all the asset classes, bar South African cash, have been the top-performing asset class at least once, and all eight have been the worst performing asset class at least once.

It is also worth noting the volatility of asset class returns from one year to the next. In 1999, for example, the return for South African equities was 70.8%, making it the top performing asset class; in 2000 it was 0.4%, making it the worst performing asset class. In 2001, SA equities delivered 32.6% and a year later -8.3%!

Time counts

This clearly illustrates how difficult it is for the average investor to select the best-performing asset class for the next year. However, as expected over the full 20-year period, returns normalise and growth assets (equities and property) outperform fixed income assets (cash and bonds), as illustrated below.

Source: Morningstar as at 31.12.16. BofAML USD Libor used as proxy for Offshore Cash; Citi WGBI used as proxy for Offshore Bonds; MSCI ACWI used as proxy for Offshore Equities; STeFI Composite used as proxy for SA Cash; S&P Global Property used as proxy for Offshore Property. Returns based in ZAR.

Multi-asset portfolios: one-stop solutions

In recognition of the challenges investors face in selecting single asset classes, professional money managers offer what are termed managed or balanced portfolios, where the complex asset allocation decisions are made by a portfolio manager who has the experience, support, access to information and time to do so. The benefits of these multi-asset funds have been recognised by investors and their financial advisors – Association of Savings and Investment South Africa (ASISA) quarterly statistics show that investors continued to favour South African multi-asset portfolios, with net inflows of R49.4 billion for the year ended 30 June 2017. And following multiple years of strongly positive net inflows, SA multi-asset portfolios now hold 50% of the unit trust industry’s R2.09 trillion assets under management.

The Investec Opportunity Fund is such an asset allocation solution. It is a balanced portfolio of high-quality local and foreign stocks and fixed income assets and seeks to create real wealth over the long term while minimising downside risk.

The fund is managed by the globally integrated Quality team led by Clyde Rossouw, who joined Investec Asset Management in 1999. The team comprises 16 investment professionals who are based in Cape Town, London and New York, and who are highly experienced in analysing stocks and fixed income assets in line with their philosophy.

In managing this fund, the team has always recognised the importance of growing investors’ capital and providing sustainable, inflation-beating returns over time. Their focus, therefore, is not on outperforming a particular benchmark or peers but on compounding investors’ wealth over time, thereby helping them to keep their purchasing power intact. Importantly, the team’s risk, quality and valuation framework means that they only invest in opportunities where they are paid to take on risk; where there is a sufficient margin of safety. By way of example, by carefully managing risk, the Investec Opportunity Fund has achieved attractive real returns at lower volatility than the average fund in the Multi-Asset High Equity sector since inception¹.

Portfolio construction is key to managing volatility. Different asset classes provide different returns at different points of the economic cycle, helping to smooth returns over time. For instance, when the rand depreciates against major currencies, SA bonds usually come under pressure and bond yields rise. In such a situation, the fund’s offshore equity position helps to mitigate rand weakness, thanks to its foreign currency exposure. Offshore returns will be further bolstered when the underlying stocks enjoy a rerating.

On the other hand, when the rand appreciates and SA bonds do well, the fund’s bond and local currency exposure will help to smooth returns when our foreign currency position deteriorates. In constructing these portfolios, Rossouw therefore seeks a balance of exposures with both levers and shock absorbers so that they can generate consistent return in multiple environments. Importantly though, he will take aggressive positions in areas of the market where the team has high conviction.

As the fund complies with Regulation 28 of the Pension Funds Act, it is also suitable as the underlying investment options in respect of retirement funding investments (pension or provident funds, preservation funds or retirement annuities).

• Paul Hutchinson is sales manager, Investec Asset Management

1. Inception date: 02.04.00, A class. Source: Morningstar as at 30.06.17. Returns are calculated on a NAV-to-NAV basis, net of A class fees, with gross income reinvested. Market indices are gross of fees. Highest and lowest 12-month rolling performance since inception* is 43.8% and -15.7% respectively.