Sensible swing back to multi-asset funds
Coronation Fund Managers chief investment officer Karl Leinberger puts forward a strong case for the deployment of good active asset allocation and security selection in the current volatile and uncertain times.
Writing in the company’s quarterly newsletter Corospondent, Leinberger concedes that all clients are different, each with differing needs and risk budgets. “Some have the appetite and ability to make active asset allocation decisions (both are needed!); others do not.”
He doesn’t demolish the case for clients opting for building block funds in any market, but says nevertheless: “I do think that clients with the opportunity to invest in a credible multi-asset fund should take it.
“We think that an investment in our multi-asset funds makes more sense for most of our clients than an investment in our underlying building block funds.”
HE GIVES THESE REASONS:
Asset allocation is the most important decision that you make in investments. The ultimate value added by good asset allocation decisions dwarfs the alpha that can be delivered in the underlying building blocks. You need to get it right and it makes sense to leave the asset allocation to the experts. Multi-asset funds can make full use of all the asset classes, including ‘in-thegap’ assets. Often the building-block approach involves a simple allocation to vanilla bonds, equity and cash. Many of these funds end up without meaningful allocations to important assets like property and inflation-linked bonds and to some of the smaller asset classes such as commodity-traded exchange funds and preference shares. Risk is best managed by a manager who has sight of the overall portfolio. For example, a domestic equity building block heavily i nvested i n resource stocks has very different fundamentals to one heavily invested in either rand-hedge dual-listed stocks or domestic stocks. The same applies to a domestic bond portfolio. One heavily i nvested i n long-duration fixed-rate bonds would respond completely differently to interest rate changes than one heavily invested in floating-rate bonds. Coronation’s investment team spends enormous amounts of time thinking through the risk of unintended positions that can occur within the overall multiasset portfolio from the views taken in each of the underlying building blocks; and identifying the best risk-adjusted returns across all asset classes and sectors, and across the capital structure of every company. A good example of this would be 2006, when all interest-rate-sensitive assets collapsed at the beginning of the ratehiking cycle. In equity funds, Coronation bought banks and retailers and in its bond funds it bought fixed-rate bonds. However, in its multi-asset funds it was empowered to sift through the entire spectrum of interest- rate- sensitive assets and identify those that offered the best risk-adjusted returns. At the time, the best opportunities were in retailers and property stocks. Only in a multi-asset fund could one have taken full advantage of the opportunity. The ability to allocate capital across the full spectrum of asset classes simply gives a manager a bigger toolbox to add value in client portfolios. Multi- asset funds can be tailored and flexed. In the 1990s the classic balanced fund, with a risk budget that reflected requirements of the typical pre-retirement investor, was all that was available to clients. However, the early 2000s saw the category grow with the launch of absolute return multi-asset funds, with risk budgets aimed at the typical retired investor. The importance of getting asset allocation weightings right in a multi-asset context was also highlighted by Coronation property specialist Anton de Goede at a recent Coronation presentation to independent financial advisers last month.
He said that following the US Fed’s decision to start phasing out quantitative easing, the market punished the property sector during the second half of 2013 and into the start of 2014 as it expected a sharp rise in interest rates. “We believed the negative interest rate view priced into the sector was excessive and subsequently increased exposure in our balanced funds to 15%, which was quite a big position relative to most other balanced funds at 10% or lower.”
This asset allocation decision stood our portfolios in good stead during 2014, said De Goede. The sector ended up being the JSE’s best performer last year with a 26.6% return in rand terms and 15.3% in US dollar terms, despite a particularly poor January.
“These polarised movements i n the fortunes of the sector were mostly associated with either actual interest rate movements or market sentiment regarding potential interest rate movements.
“Currently, it remains finely balanced between dividend growth expectations and the yield relative to long bonds. Expectations of interest rate normalisation taking longer and in smaller increments continue to provide some support for the sector and the correlation with bond yields remain fairly intact.
“And with dividend growth prospects remaining relatively positive over the next 12 to 24 months, performance this year should be driven by the overall fixed-income market, which we will follow closely.”