Cap­i­tal preser­va­tion

Finweek English Edition - - INVESTMENT -

Ear­lier this year I wrote about the Grindrod Sta­ble Fund which we be­lieved was a good op­tion for con­ser­va­tive in­vestors seek­ing in­come from their port­fo­lio. We fol­lowed that up with an ar­ti­cle on the Pru­den­tial In­fla­tion Plus, which we be­lieve is a good choice for in­vestors seek­ing cap­i­tal sta­bil­ity and growth rather than in­come from a con­ser­va­tive fund.

Af­ter the lat­ter ar­ti­cle I re­ceived an email from a reader want­ing to know which of the newer funds in the mul­ti­as­set, low-eq­uity cat­e­gory would be a good fund to in­vest in. He has this the­ory that new funds tend to do bet­ter than es­tab­lished funds be­cause, ac­cord­ing to him, the fund man­agers need to get the per­for­mance up there to be able to at­tract inf lows. It is a the­ory I have heard be­fore, but it is cer­tainly not one I sub­scribe to in the ab­sence of any hard data.

There is a size the­ory which sug­gests that smaller funds tend to out­per­form be­cause they are able to get a mean­ing-





-2% -4% Jan 2014 ful ex­po­sure to small-cap shares, some­thing which larger funds are un­able to do. I imag­ine that the reader had sight of a re­cent pa­per en­ti­tled Scale and skill in ac­tive man­age­ment which was re­leased ear­lier this year by Whar­ton f inance pro­fes­sors Robert Stam­baugh and Luke Tay­lor, and Chicago Univer­sity’s Dr Lu­bos Pas­tor, which found that where man­agers had sim­i­lar skill lev­els, man­agers of smaller funds out­per­formed man­agers of large funds. “If scale im­pacts per­for­mance, skill and scale in­ter­act: for ex­am­ple, a more skilled large fund can un­der­per­form a less skilled small fund,” says Stam­baugh. I have yet to see re­search on the South African ex­pe­ri­ence, but given the rel­a­tive size of the mar­kets I imag­ine that it would be quite a dif­fer­ent ex­pe­ri­ence.

If I did have a prover­bial gun against my head to pick a new, up-and-com­ing f und in the multi-as­set, low-eq­uity cat­e­gory, then my choice would be the Fo­ord Con­ser­va­tive Fund (FCF). The fund was launched in Jan­uary 2014 and has a bench­mark of CPI + 4% per an­num. There are a num­ber of rea­sons I would go for the FCF, the main one be­ing that the man­ager has a cred­i­ble track record in man­ag­ing as­set al­lo­ca­tion man­dates. The fund also fits quite neatly into the man­ager’s phi­los­o­phy of cap­i­tal preser­va­tion first. The man­ager has been man­ag­ing another fund in the same cat­e­gory since 2007, the Ned­group Sta­ble Fund, which also has a CPI + 4% per­for­mance tar­get. The FCF is dif­fer­ent to that fund in that it can go up to 60% eq­uity ex­po­sure while the Ned­group fund has a max­i­mum of 40%.

Another at­trac­tive fea­ture of the FCF is its cost struc­ture, which sees the man­ager charg­ing 0% an­nual fees in the event that there is a loss over a rolling 12-month pe­riod. This aligns the man­ager’s in­ter­est with the client’s need for cap­i­tal pro­tec­tion. The per­for­mance fee also f lexes quite quickly in that re­turns are mea­sured over rolling 12-month pe­ri­ods, so in­vestors are not sad­dled with high per­for­mance fees for lumpy out­per­for­mance pe­ri­ods.

The Fo­ord Bal­anced, Flex­i­ble and In­ter­na­tional Trust al­ready fea­ture on our in­ter­nal shop­ping list for clients, so the Con­ser­va­tive Fund will be a wel­comed ad­di­tion to the list in the com­ing months. How­ever, it is the man­ager’s as­set al­lo­ca­tion track record, cap­i­tal preser­va­tion phi­los­o­phy and its fee struc­ture that will see the fund be­ing in­cluded on that list, not the fact that it is an up-and-com­ing fund.

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