Un­der­stand Sta­ble Fund

Finweek English Edition - - FIXED INTEREST INVESTMENTS -

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.

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