ASSET CLASS VIEWS
Prudential, he points out, is to maintain its portfolio positioning as it was before the rate hike. “We are confident that our positioning and individual holdings in our real return [inf lation targeted] and balanced portfolios are such that these funds will continue to deliver real returns above cash. Cash will still produce very low real returns over the next two to three years.
“However, bond returns will remain under pressure from global conditions in the short term, so those investors concerned about returns over the next six to 12 months would be best placed in cash or near-cash assets.” THESE ARE KINSLEY’S VIEWS ON THE MAJOR ASSET CLASSES: Offshore equities: Overweight. Developed market equities offer the best value, with a few emerging market equities also looking attractive. However, sentiment is still negative on the latter as investors worry about longer-term growth prospects.
Offshore bonds: Prudential differs from some of its competitors in this area. While it has no exposure to sovereign bonds, on the corporate and high-yield bond side it’s overweight in t e r ms o f its competitors but underweight in terms of its own strategic benchmark. International corporate bonds offer a good yield spread and are an excellent diversification asset class.
South African equities: On value metrics such as earnings yield and price to book, it is on the slightly expensive side of fair value and priced to deliver a real return of around 7% a year on a threeto f ive-year view. The real challenge is that there are some massively expensive industrials and some very cheap resource shares. The challenge to asset managers is to know when to switch, and then to know which counters make the most investment sense when beginning that process.
Domestic listed property: Broadly neutral. The universe of South African REITs (Real Estate Investment Trust) currently offers a relatively attractive forward distribution yield of 8.2%, and combined with a robust distribution growth, is price to deliver a real return of over 5% a year over the next five years. This makes it likely to outperform both bonds and cash over the medium term.
Domestic bonds: Prudential is overweight bonds relative to its peers and its own strategic allocation. It is overweight corporate bonds on the shorter end of the curve, has little exposure in the middle, and is overweight longer-dated bonds. It believes that corporate bonds offer good yield pickup and little duration risk, and is well disposed to long bonds which give 1-1.5% extra yield relative to the middle of the curve at reasonable risk.
Prudential was recently named by Morningstar as one of the country’s top three large asset managers. Its Inf lation Plus Fund and Global High Yield Bond Fund of Funds also won Raging Bull certificates for top performance in the Global Bond and Multi-Asset Low Equity categories to 31 December 2013.