Understand Stable Fund
Investors can play a key role in their investment success by understanding their fund’s risk profile and objectives and how their fund manager goes about picking investments. “This helps you to remain focused and not lose heart during periods of underperformance,” say Claudia Del Fante and Lise-Mari Crafford of Allan Gray. The Allan Gray Stable Fund aims to meet the needs of the more conservative investor with a low tolerance for capital loss over any two-year period. The fund’s positioning may be suitable for the risk-averse investor who requires capital stability while simultaneously seeking to capture longterm returns in excess of bank deposits. FUND COMPOSITION As an asset allocation fund, the Stable Fund may invest in a range of asset classes, such as shares, bonds, cash, property or offshore assets. The returns investors ultimately experience come from all the different components that make up the fund.
The fund’s large cash holding acts as the foundation to its stability with the alternate asset class exposure being used to generate superior returns to cash over the long term. The fund managers use a bottomup equity selection process, looking for shares that they believe are priced below fair value. They place emphasis on picking shares with limited risk of capital loss, high current or prospective dividend yields and shares that tend to perform differently from the overall market. EXPECT SOME SHORT-TERM VOLATILITY Although conservatively managed, the fund’s equity and offshore exposure introduce a level of volatility to returns over short periods of time. The offshore exposure is a case in point. In previous years, the fund’s offshore investments lagged its local holdings. As the fund was at its maximum offshore exposure (25% the maximum allowed under the retirement fund regulations), this detracted from relative performance. In 2013, however, Allan Gray’s offshore partner Orbis experienced a sharp turnaround in relative and absolute performance as the rand weakened, and the offshore component became the largest contributor to the success of the Stable Fund over the year.
It is not uncommon for the fund to generate a negative return over a one-month period. “While it would be nice for our funds to consistently top the short-term performance charts, this is not our aim. We believe an unhealthy focus on shortterm performance can be detrimental to us creating long-term wealth for our clients,” say Del Fante and Crafford.
Minimising the risk of permanent capital loss over a two-year period is an explicit objective of the fund. Despite short-term volatility over a one-year rolling period, the fund has managed to achieve its primary goal of protecting clients’ capital consistently for 13 years. “In addition, it is pleasing to see the level to which the fund reduces the volatility of the asset classes inherent in the fund. Equity exposure offers a great opportunity for significant reward, however, only if purchased at the right price. The fund is comfortable foregoing short-term upside to avoid taking on unnecessary levels of risk.” RETURNS IN DIFFERENT MARKET CONDITIONS By virtue of its conservative equity positioning, the Stable Fund tends to lag its peers when the market is rising but provides protection for its investors when the tide turns. The graph shows the average monthly returns of the fund since inception (versus its benchmark) during months when the Alsi delivered a positive return (100 months) and during months when the Alsi delivered a negative return (62 months).
In the 100 months of a positive return, the Alsi had an average monthly return of 4.7%. The average monthly return for the fund was 1.2%, outperforming its benchmark by 0.6% per month on average and capturing about a quarter of the average monthly return of the Alsi. It is in the 62 months when the market declined that the true nature of this fund is evident. The fund protected its capital by returning 0.6% per month on average, whereas the Alsi had an average monthly return of -3.6%. Combining both up and down months for the full 162-month period, the Alsi delivered an average monthly return of 1.5%. The fund was able to deliver an average monthly return of 1% – with significantly lower annualised volatility in monthly returns. TRY NOT TO BE SWAYED BY EMOTION Investors are often swayed by sentiment and make rash investment decisions on the back of short-term noise in the markets. A major risk to unit trust investors is that they personally do not enjoy the same returns as their fund. Unit trust investors who adopt a long-term approach are usually more successful than those who attempt to time the market.