Sen­si­ble swing back to multi-as­set funds

Finweek English Edition - - INSIDE -

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.”

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